From Politics to Efficiency in Choice of Law

Abstract

This article proposes a comprehensive system for choice of law that is designed to enhance social wealth by focusing on individual rather than governmental interests. To the extent practicable, parties should be able to choose their governing law. In the absence of an explicit agreement, courts should apply rules that facilitate party choice or that select the law the parties likely would have contracted for -that is, the law of the state with the comparative regulatory advantage. The system relies on clear rules that enable the parties to determine, at low cost and ex ante, what law applies to given conduct, and therefore to choose the applicable law by altering their conduct. State regulatory concerns are accounted for through explicit state legislation on choice of law rather than ad hoc judicial determination of the states’ interests. The article shows how this system might be implemented through jurisdictional competition. O'Hara & Ribstein 01/07/00 2 I. AN EFFICIENCY APPROACH TO CHOICE OF LAW 5 A. THE PROBLEM OF INEFFICIENT LAWS 6 1. Legislators 6 2. Courts 8 B. EXIT AS A POTENTIAL SOLUTION TO INEFFICIENT LAWS 9 C. THE EFFECT OF EXIT ON EFFICIENT LAWS 11 II. PROBLEMS WITH EXISTING THEORIES 13