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Majoritarian vs. Minoritarian Defaults
Ayres, Ian Gertner, Robert
Ayres, Ian
Gertner, Robert
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Abstract
Recent theoretical analysis of contract default rules has devoted significant attention to the use of penalty default rules as a way to induce a contractor to reveal private information. Penalty default rules demonstrate how efficient rules cannot be derived by simply asking what most parties would have contracted for had they written a complete contract. Such "majoritarian" default rules derive from an implicit assumption about the reason why a particular contract is incomplete. A fuller efficiency analysis tries to understand the reasons why contracts are incomplete and how different default rules affect the efficiency of the contracting process and the contracts themselves. Our goal here is to show how an understanding of the underlying causes of contractual incompleteness informs the optimal choice of default rules.