Collapsing Illusions: Standards for Setting Efficient Contract and Other Defaults

18 Pages Posted: 25 Mar 2016

See all articles by Steven J. Burton

Steven J. Burton

University of Iowa - College of Law

Date Written: March 4, 2016

Abstract

In this Essay, Professor Burton analyzes and evaluates four commonly used standards for setting efficient default rules and standards. Based on two theoretical insights, he shows that three of them collapse upon analysis into the fourth, a Coasian standard that turns out to be a dead end. The theoretical upshot is that the Coase Theorem often is a good reason to use defaults rather than mandatory rules or standards. But neither the theorem nor reference to a transaction-costless world sustains particular defaults. To set an efficient default, the law should guide courts toward supplying terms that parties should have adopted to generate a surplus from the term or a cluster of related clauses.

Keywords: contracts, contract theory, default rules, law and economics, corporations, economics

Suggested Citation

Burton, Steven J., Collapsing Illusions: Standards for Setting Efficient Contract and Other Defaults (March 4, 2016). Indiana Law Journal, Vol. 91, No. 3, 2016, U Iowa Legal Studies Research Paper No. 16-04, Available at SSRN: https://ssrn.com/abstract=2742342

Steven J. Burton (Contact Author)

University of Iowa - College of Law ( email )

Melrose and Byington
Iowa City, IA 52242
United States

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