Two Economic Theories of Enforcing Promises

Abstract

This paper describes the modern economic analysis of contract law, emphasizing its (often unappreciated) similarities with various non-economic perspectives. The economic analysis began with theories that equated the efficiency of enforcing promises with the efficiency of carrying out the promised actions, a view that was starkly at odds with many non-economic perspectives. By contrast, though, modern economic analyses recognize that legal enforceability triggers a much more complex set of effects. For example, enforceability may influence not only whether the promise is carried out, but also whether the promise gets made at all, or how carefully the promisor thinks about the promise before making it, or how much the promisor spends on precautions to guard against accidents that might leave her unable to perform in the future (to list just a few of the possibilities). This paper first describes the more modern economic approach, and distinguishes it from the older view that the efficiency of enforcement depends only on the efficiency of the promised actions. It then discusses the implications of that distinction for several issues of philosophical interest. For example, questions of paternalism - should courts try to decide whether enforcement of a promise would be efficient, or should they leave that to the parties to decide? - become more difficult once it is recognized how many effects must be considered in any assessment of efficiency. The argument that promises should be enforced only if and when they have been relied upon, and the related argument that damage remedies should be limited to reliance damages, also become more doubtful once the effect on reliance is seen as only one of the possible effects of legal enforceability. The paper also discusses the similarities between modern economic analysis and the views of (a) "relational contract" theorists, who emphasize that many contracts govern an ongoing, multi-faceted relationship; (b) "private regulation" theorists, who analogize contracts to regulatory schemes that are enacted by private parties; and (c) "property theorists," who see contracts as instantaneously transferring an entire bundle of property rights and duties.