A Theory of Mandatory Rules: Typology, Policy, and Design.

Abstract

In a perfectly competitive market, the law should simply give effect to the parties' agreements (assuming, that is, that efficiency is all we care about). Real-world markets and real people are often a far cry from this ideal. Market failures (including behavioral ones) call for serious consideration of regulation. For decades, market regulation has focused on disclosure duties. However, mounting evidence suggests that such duties are often ineffective. Alongside endless attempts to make disclosures more effective-driven in part by ideological aversion to other modes of regulation, and in part by regulatory capture-there is growing disillusion about this path, which is shared by some law-and-economics scholars.2 In the past decade or so, there has been much enthusiasm about the use of nudges-"low-cost, choicepreserving, behaviorally informed approaches to regulatory problems"'as a non-intrusive way to influence people's behavior in desirable ways. However, there are increasing doubts about the effectiveness of nudges as well, especially when suppliers have an incentive to counter their effects.

In response to these realizations, some are inclined to conclude that regulation (or much of it) should be abandoned altogether, leaving the scene to market forces of reputation and competition.7 An alternative conclusion is that the failure of disclosure duties and the limited efficacy of nudges call for more serious consideration of the use of mandatory regulation of the content of transactions. This Article focuses on such measures, which we dub "substantive mandatory rules." Other regulatory means, such as disclosure duties and cooling-off periods, are also often nonwaivable. But these other means, which we dub "procedural mandatory rules," regulate the process by which contracts are formed.8 Regulation of the substantive content of transactions is unique in the sense that it does not content itself with improving the conditions under which people make contracts, but rather intervenes in their content. Examples of substantive mandatory rules include usury laws, minimum-wage statutes, and statutes that set minimal liability of construction firms for building defects. Substantive mandatory rules sometimes respond to procedural defects in contracts, such as information problems, and sometimes aim at other goals. Some mandatory rules respond to defects in both the process of contracting and the substance of contractual provisions. A case in point is the doctrine of unconscionability, which limits enforcement where there is an improper admixture of procedural and substantive unconscionability.