A Bargain, the Best I Never Had: Hypothetical Bargains and the Morality of Efficient Breach

Abstract

This article defeats Shavell’s prominent view in contract theory regarding the morality of breach. His theory was at the vanguard of the current movement of economic theorists to square their approval of efficient breach with the moral intuition against it. The theory offers a bargaining-based model of the moral force of promises and concludes that efficient breaches are never immoral. I show that this model makes for a shoddy theory of contract law and promises. Further, I illustrate how the model is underdeveloped from an economic perspective. Finally, I consider the assumptions needed to develop the model while maintaining Shavell’s conclusion. I demonstrate that these assumptions are not met in the vast majority of cases. As result, the intuitive disdain laypeople have toward efficient breach remains a serious problem for economic theories of contract.