Eroding Entitlements as Litigation Commitment

Abstract

This Comment on Omri Ben-Shahar's excellent article makes two points: 1. Entitlements might be more valuable under an erosion rule than under a no-erosion rule. 2. In contractual settings, any observed irrelevance is likely to be the product of forces that are independent of Omri Ben-Shahar's "litigation commitment" antierosion effect. But before discussing these two issues, let me briefly reformulate Ben-Shahar's contribution. First, erosion rules can give rise to an "antierosion" effect because erosion rules are a litigation commitment device that helps entitlement holders commit to prosecuting a broader class of opportunistic breaches. In Ben-Shahar's model, erosion is caused by promisors who intentionally chisel on their duties, knowing, because of the costs of litigation, that the promisees cannot credibly threaten to sue. Second, Ben-Shahar's irrelevance claim is both stronger and weaker than he acknowledges. The irrelevance claim is stronger, because his model shows not just that erosion costs will be the same under different erosion rules, but that we know that these costs will always be exactly equal to litigation costs saved. The promisors will always chisel to the point where the promisee is almost indifferent between paying litigation costs and swallowing the erosion costs. The irrelevance claim is weaker than Ben-Shahar suggests because, while total erosion costs stay the same, different erosion rules produce different profiles (or cash flows) of erosion. The model predicts that no-erosion rules will produce constant amounts of erosion in each period, but that erosion rules will produce increasing amounts of erosion in each period (less erosion than under a no-erosion rule in early periods and more erosion than under a no-erosion rule in later periods). These different erosion profiles predicted by the model provide an important testable implication. If we don't think that promisors increase their chiseling through the course of their performance, then we might question whether other parts of Ben-Shahar's model are accurate.