There are no Penalty Default Rules in Contract Law

In an influential article, Ian Ayres and Robert Gertner introduced the concept of the "penalty default rule," a rule that fills a gap in an incomplete contract with a term that would not be chosen by a majority of parties similarly situated to the parties to the contract in question. Ayres and Gertner argued that such a rule might be efficient in a model in which contracting parties have asymmetric information. However, Ayres and Gertner did not provide any persuasive examples of penalty default rules; their best example is the Hadley rule, but this rule is probably not a penalty default rule. It turns out that there are no plausible examples of penalty default rules that solve the information asymmetry problem identified by Ayres and Gertner. The penalty default rule is a theoretical curiosity that has no existence in contract doctrine.

[1]  Daniel N. Shaviro.  Budget Deficits and the Intergenerational Distribution of Lifetime Consumption , 1995 .

[2]  Eric A. Posner,et al.  A Theory of Contract Law under Conditions of Radical Judicial Error , 1999 .

[3]  David A. Weisbach,et al.  Line Drawing, Doctrine, and Efficiency in the Tax Law , 1998 .

[4]  D. Baird,et al.  The Law and Economics of Contract Damages , 1995 .

[5]  D. Baird,et al.  The Hidden Virtues of Chapter 11: An Overview of the Law and Economics of Financially Distressed Firms , 1997 .

[6]  J. Mark Ramseyer,et al.  The Market for Children: Evidence from Early Modern Japan , 1995 .

[7]  John R. Lott,et al.  Environmental Violations, Legal Penalties, and Reputation Costs , 1999 .

[8]  R. Posner,et al.  The Long-Run Growth in Obesity as a Function of Technological Change , 1999, Perspectives in biology and medicine.

[9]  John R. Lott,et al.  Does a Helping Hand Put Others at Risk?: Affirmative Action, Police Departments, and Crime , 2000 .

[10]  John R. Lott,et al.  Term limits and electoral competitiveness: Evidence from California’s state legislative races , 1997 .

[11]  Chicago Unbound,et al.  What Do Judges and Justices Maximize? (The Same Thin gs Everyone Else Does) , 1993 .

[12]  Randal C. Picker.  Simple Games in a Complex World: A Generative Approach to the Adoption of Norms , 1997 .

[13]  William M. Landes,et al.  Sequential versus Unitary Trials: An Economic Analysis , 1993, The Journal of Legal Studies.

[14]  John R. Lott,et al.  How Dramatically Did Women's Suffrage Change the Size and Scope of Government? , 1998 .

[15]  John R. Lott,et al.  A Simple Explanation for Why Campaign Expenditures are Increasing: The Government is Getting Bigger , 1999 .

[16]  Lisa E. Bernstein.  ‘The Questionable Empirical Basis of Article 2’s Incorporation Strategy: A Preliminary Study , 1999 .

[17]  Richard A. Epstein.  Contracts Small and Contract Large: Contract Law through the Lens of Laissez-Faire , 2020, The Fall and Rise of Freedom of Contract.

[18]  Kenneth W. Dam,et al.  Chicago Unbound , 2018 .

[19]  Randal C. Picker.  Security Interests, Misbehavior, and Common Pools , 1992 .

[20]  Richard A. Posner,et al.  What Do Judges and Justices Maximize? (The Same Thing Everybody Else Does) , 1993, Supreme Court Economic Review.

[21]  Alan O. Sykes,et al.  Justice in immigration: The welfare economics of immigration law: a theoretical survey with an analysis of U.S. policy , 1992 .

[22]  A. Sykes.  An Introduction to Regression Analysis , 1993 .

[23]  W. Landes,et al.  Winning the Art Lottery: The Economic Returns to the Ganz Collection , 1999, Recherches économiques de Louvain.

[24]  R. Epstein,et al.  Transaction Costs and Property Rights: Or Do Good Fences Make Good Neighbors? , 1997 .

[25]  J. Mark Ramseyer,et al.  Explicit Reasons for Implicit Contracts: The Legal Logic to the Japanese Main Bank System , 1993 .

[26]  Richard A. Posner,et al.  An Economic Approach to the Law of Evidence , 1999 .

[27]  Richard A. Epstein,et al.  The Ubiquity of the Benefit Principle , 1994 .

[28]  Geoffrey P. Miller,et al.  Explaining Deviations from the Fifty-Percent Rule: A Multimodal Approach to the Selection of Cases for Litigation , 1996, The Journal of Legal Studies.

[29]  Christine Jolls,et al.  A Behavioral Approach to Law and Economics , 1998 .

[30]  John R. Lott,et al.  Punitive Damages: Their Determinants, Effects on Firm Value, and the Impact of Supreme Court and Congressional Attempts to Limit Awards , 1998 .

[31]  John R. Lott,et al.  Multiple Victim Public Shootings, Bombings, and Right-to-Carry Concealed Handgun Laws: Contrasting Private and Public Law Enforcement , 1999 .

[32]  Kenneth W. Dam.  Self-Help in the Digital Jungle , 1999 .

[33]  Randal C. Picker,et al.  Bankruptcy Rules, Managerial Entrenchment, and Firm-Specific Human Capital , 1993 .

[34]  Richard A. Posner,et al.  Values and Consequences: An Introduction to Economic Analysis of Law , 1998 .

[35]  Richard A. Posner,et al.  Status Signaling and the Law, with Particular Application to Sexual Harassment , 1999 .

[36]  C. Sunstein,et al.  Private Broadcasters and the Public Interest: Notes Toward a 'Third Way' , 1999 .

[37]  William M. Landes,et al.  The Art of Law and Economics: An Autobiographical Essay , 1997 .

[38]  E. Glaeser,et al.  Incentives and Social Capital: Are Homeowners Better Citizens? , 1998 .

[39]  Alan O. Sykes,et al.  The Welfare Economics of Immigration Law , 1995 .