Regulating Opt-Out: An Economic Theory of Altering Rules

Abstract

Whenever a rule is contractible, the law must establish separate rules governing how private parties can contract around the default legal treatment. To date, contract theorists have not developed satisfying theories for how to set “altering rules,” the rules that establish the necessary and sufficient conditions for displacing a default. This Article argues that when setting altering rules, efficiency-minded lawmakers should consider the costs of altering, the costs of various kinds of error, and the possibility that altering can impose negative externalities on others. There are two broad reasons for structuring altering rules that deviate from merely minimizing the transaction cost of altering. First, the Article develops conditions in which minimizing the costs of party error (especially nondrafter error) and third-party error (especially judicial error) will be paramount. It proposes a variety of altering interventions—including “train-and-test” altering rules, “clarity-requiring” altering rules, “password” altering rules, and “thought-requiring” altering rules—that might be deployed to reduce altering error. Second, when externality concerns or paternalistic concerns to protect the contractors themselves are insufficient to justify a full-blown mandatory rule, lawmakers might at times usefully impose “impeding” altering rules, which deter subsets of contractors from contracting for legally disfavored provisions. Impeding altering rules produce an intermediate category of “quasimandatory” or “sticky default” rules, which manage but do not eliminate externalities and paternalism concerns. These two deviations from transaction-cost minimization can often be usefully complemented by a third category of altering rules—what this Article calls “altering penalties”—which penalize one or both contractors who utilize disfavored altering methods. Altering penalties can channel contractors’ altering efforts toward means that better reduce error or better control externalities or paternalism. More explicitly theorizing altering rules as a distinct category of law can make visible legal issues that have largely gone unnoticed and lead toward the development of more defensible choices about how best to regulate opt-out.