The Economics of the Non-Discrimination Principle in General Contract Law

Abstract

: This article addresses the problem of racial and sex discrimination in contracting with a view to determining whether the adoption of a non-discrimination norm in general contract law is an efficient remedy against discrimination. Regulatory intervention in contracting is necessary to reduce discrimination when competitive markets are not effective in penalizing sellers who act on discriminatory preferences. However, regulatory intervention in contracting to forbid the use of race or sex as signals for underlying cost characteristics increases information costs for all customers and brings about costly offsetting redistributions of wealth, possibly to the disadvantage of the intended beneficiaries of the non-discrimination policy. The non-discrimination norm in general contracting is therefore optimally structured as a standard which merely prohibits unreasonable discrimination. With sufficiently high sanctions to facilitate enforcement in cases where damages are small, such a standard – when comprising an economic balancing test – would deter invidious forms of discrimination, but would result in upholding some sex or racial discrimination in contracting on efficiency grounds.