Valuing modern contract scholarship.

• Author: Ayres, Ian
• Position: Response to article by Eric A. Posner in this issue, p. 829

1. INTRODUCTION

   Eric Posner has written a thoughtful and provocative indictment of the modern economic analysis of contracts. His essay makes two central claims about the failings of scholars "to produce an `economic theory.'" (1) Specifically, Posner claims that the economic approach "does not explain the current system of contract law" and that it does not "provide a solid basis for criticizing and reforming contract law." (2) In other words, Posner claims that modern scholarship fails as either a descriptive or a normative theory, in that it fails to give an account of what current law is or what efficient law should be.

   The descriptive criticism deserves only brief comment. Although he claims that modern scholarship has failed to achieve "what its proponents set out as the measure of success," (3) Posner sadly distorts reality by claiming that the leading scholars have been engaged in an attempt to use economic theory to predict the content of current legal rules. This is a straw man. Of course, decades ago this was the project of Richard Posner. (4) But the thought that efficiency analysis would provide a mechanism to predict the details of current doctrine is a serious misreading of the aims of modern scholarship. Posner himself concedes that Steven Shavell, Charles Goetz, Robert Scott, Alan Schwartz, Richard Epstein, Alan Sykes, Michelle White, Richard Craswell, Avery Katz, Eric Rasmusen, and I have not been engaged in using efficiency analysis to predict the content of current law. (5) Posner's essay would be much stronger if he jettisoned the descriptive criticism.

   Posner's normative claim that modern scholarship fails "to provide a basis for criticizing or defending those roles" (6) is much more troublesome and deserves a more extended comment. Posner argues that the economic models are either too simple or too complex to yield persuasive advice about what the law should be. The simple models "examine only one or two margins of contractual behavior" (7) and hence are not well suited to assess whether overall efficiency would be achieved by a particular role. And because the more complex models "examine a greater variety of behavior, or because they rely on more complicated ideas, such as information asymmetry ... [they] often ... fail because they are indeterminate." (8) The more realistic models often suggest that the optimal content of contract law will turn on details of the underlying environment that will be difficult for lawmakers to ascertain.

   This normative critique is an important concern. Instead of pursuing the descriptive claim, the coterie of modern contract scholars has aspired to assess the efficiency of alternative contract roles. And regardless of the scholars' intent, scholarship that fails to provide a perspective that would aid in the normative enterprise would be ultimately unsuccessful.

   This normative critique is also related to Posner's suggestion that modern economic analysis of contract law seems to have run its course. He is "skeptic[al] about how much additional value [it] has to offer to understanding contract law today." (9) Let's call this the evolutionary critique. The idea that economic analysis has intellectually painted itself into a corner parallels analogous claims made about game theory more generally--that the models are either too reductive or too indeterminate to be of practical normative value. (10) An unmistakable tone of pessimism pervades Posner's prose.

   I concede that much of the modern scholarship is either based on reductive models or yields normative results that are contingent on particular parameter values of the underlying environment. But I see much more normative value in the contributions of the last two decades. Maybe the largest contribution is in destabilizing false confidence in prior analysis. If prior consensus holds that default rules should simply be set to provide the substantive provision that most contractors want, then a reductive model that simply provides a counterexample can represent an important contribution. Economists become famous for proving "impossibility theorems," (11) but "possibility" theorems are also valuable.

   A lot turns then on what constitutes "a basis for criticizing or defending" contract rules. (12) Modern scholarship has succeeded in supplanting unsupportable beliefs with a more supportable agnosticism. If prior consensus wrongly holds that a particular contractual rule worked across the broad range of contractual settings, then an article that shows that the efficiency of the rule's operation is affected by some underlying bargaining parameter is important whether or not lawmakers can easily assess the size of the crucial parameter. Showing that prior beliefs were overly determinate constitutes a basis for criticism. It is slightly ironic that Posner, in what is essentially a "trashing" piece, refuses to see the value of "trashing" itself. (13)

   If agnosticism were the only contribution of the modern scholarship, it would be reasonable to worry that the field would quickly paint itself into a corner. But Posner himself concedes:

   [E]ven if economic models cannot generate a determinate optimal contract law, they helpfully identify the costs and benefits of different legal rules.... [E]ven if economic analysis cannot determine the magnitude of these costs and benefits, and the extent to which they offset or interact with each other, the judge who knows about them is more likely to make a wise decision than a judge who does not. (14) Posner, however, immediately rejects the qualitative value that the models might have for lawmakers:

   This defense has an air of plausibility but also distressingly open-ended and unambitious implications. The last decade has witnessed a piling on of relevant factors, but no increasing clarity about the function of contract law, and a wise judge might, in order to avoid paralysis, simply ignore them. But the scholarship itself is mute about its own weaknesses. (15) It is here that Posner and I part company. First, the scholarship has not been mute about either the indeterminacy concern or the "piling on" of factors. (16) For example, Rob Gertner and I have shown in a simple model that an optimal legal rule can turn on subtle differences in the parties' costs of contracting, and we expressly acknowledge that "[w]hen the parties' knowledge is not symmetric ... choosing the efficient contract rule can entail an extraordinarily complex analysis--which depends on subtle pieces of information that lawmakers are unlikely to know." (17)

   But more importantly, Posner's disavowal of qualitative value turns on a quasi-empirical assessment that there has been no increasing clarity about which factors should dominate. I disagree. In particular settings, lawmakers can reasonably conclude that one or another problem (such as promisee overreliance or promisor ignorance) is the most salient. Using the insights of modern scholarship, they can fashion with greater clarity laws that further their consequential objectives. But our disagreement is largely an empirical one, and the proof is in the pudding. So let me turn to my take on the more particularized successes of the modern economic analysis of contract.

2. SOME LESSONS OF ECONOMIC ANALYSIS

   I claim, counter to Posner, that modern scholarship has produced important normative results--clarifying when contract rules should be mandatory, illuminating a richer theory of default rule choice, and underscoring the importance of renegotiation.

   1. Making Visible the Default/Mandatory Rule Dichotomy

      There is a certain tyranny of time. A scholar's outlook is in some way irrevocably set by the period in which he or she comes of age. Posner came of age when the first wave of game theory and informational economics had already taken hold with its "piling on" of factors. But I came of age in an earlier time. (18) Professors did not teach whether particular rules could be contracted around, (19) and most scholarship did not distinguish between optimal default rule setting and optimal setting of mandatory rules. (20) Although Karl Llewellyn had long ago discussed the difference between "iron" (i.e., mandatory) and "yielding" (i.e., default) rules, (21) and even though the Uniform Commercial Code and the various editions of the Restatement of Contracts at times included the telltale phrase "unless otherwise agreed," (22) there was not a general recognition in the classroom or in scholarship that the contractibility vel non of a particular rule is often more important than the content of the rule itself. John Langbein tells me that when writing in 1984 about the law of succession, he had to retreat to the little-known Roman law distinction between jus strictum and jus dispositivum to capture whether laws "override or yield to the contrary intentions of the parties." (23) Until the late 1980s, we simply lacked a common vocabulary--in part because the academy largely underappreciated the importance of the distinction.

      All this has changed. (24) It has become almost impossible to write a contract article without expressly articulating the default/mandatory dimension of the problem. It is impossible to ignore contractibility in choosing the content of the rule because we now know that the optimal substance for a rule will often be different for rules that are contractible than for those that are not. (25) And contra to Posner, this revolution has reached out into express lawmaking. For example, the new Uniform Trust Code law expressly and exhaustively attempts to compile all the mandatory rules in an initial section. (26) This extremely helpful undertaking was not a priority in the past. (27)

      But more than just making the default/mandatory dichotomy more visible, the default revolution has clarified when mandatory rules are and are not appropriate and has enhanced lawmakers' tool bag for creatively setting defaults.

      1. Contributions to Analysis of Mandatory Rules

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