Ayres and Gertner Versus Posner - a Re-Examination of the Theory of 'Penalty Default Rules'

23 Pages Posted: 4 Dec 2006

See all articles by Enrico Baffi

Enrico Baffi

Università degli Studi Guglielmo Marconi

Date Written: December 2006

Abstract

In March 2005, Eric Posner developed a series of arguments to demonstrate that the influential theory of "penalty default rules" is a theoretical curiosity that has no existence in American contract doctrine. This article aims to explain why Eric Posner criticizes some examples of penalty default rules proposed by Ian Ayres and Robert Gertner, authors of the paper in which penalty default rules were presented for the first time. The criticisms arise because Posner accepts a narrower concept of penalty default than that used by Ayres and Gertner. The solution presented in the paper is to consider that the rules with the function of forcing the production of information, i.e. the "information-forcing rules" constitute a category with at least two sub-categories. Within the category the two sub-categories are the "majoritarian information-forcing default rules" and the "penalty default rules." The former are efficient rules that maximize the ex ante value of the contract and are rules that a majority of informed parties would insert in the contract; the latter are inefficient rules that do not maximize the ex ante value of the contract and are destined to be contracted around in the majority of cases. Ayres and Gertner include the majoritarian information-forcing default rules in the unique category of the penalty default rules. This is a point that determines the major contraposition between the authors considered. In the paper the Italian law is also examined in order to verify the possible presence of penalty default rules. It emerges that at least one rule has all the characteristics described by Eric Posner and it must be defined as a penalty default rule.

Keywords: Penalty default rules, information forcing rules

JEL Classification: K12, L15

Suggested Citation

Baffi, Enrico, Ayres and Gertner Versus Posner - a Re-Examination of the Theory of 'Penalty Default Rules' (December 2006). Available at SSRN: https://ssrn.com/abstract=948916 or http://dx.doi.org/10.2139/ssrn.948916

Enrico Baffi (Contact Author)

Università degli Studi Guglielmo Marconi ( email )

via Parigi 44
Italy

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