Coercion, Contract and the Limits of the Market

CAE Working Paper No. 06-01

32 Pages Posted: 9 Nov 2006

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Date Written: January 2006


It is widely accepted of economics that if two or more adults voluntarily agree to a contract or an exchange that has no negative fall-out on others, then the government should not stop such a contract. This is often called the "principle of free contract" (PFC). There is a body of writing in economics which upholds the PFC. Yet, this ubiquitous principle is ill-defined and full of ambiguities. For instance, since it refers to voluntary choice, its proper use presumes an understanding of what is "voluntary" and, therefore, also, of what is coercive. What is ironic is that, while philosophers and legal scholars have debated and analyzed these concepts and the validity of the principle of free contract, there is very little discussion of these in economics, even though so much of economics is founded on this principle. This has caused a lot of policy confusion. The aim of this paper is to construct within the Paretian framework. Hence, the violation of the PFC is not justified by appeal to deontological ethics and non-welfarist criteria. This is not an easy task since the principle of free contract is often viewed as a rule that is a derivative of the Pareto principle.

Keywords: Coercion, voluntary choice, contracts, markets, government intervention

JEL Classification: D20, K10, Z10

Suggested Citation

Basu, Kaushik, Coercion, Contract and the Limits of the Market (January 2006). Available at SSRN: or

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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IZA Institute of Labor Economics

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Brookings Institution ( email )

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