Preliminary Thoughts on Optimal Tailoring of Contractual Rules

Abstract

This paper is an extremely tentative analysis of the extent to which default rules should be tailored. In the introduction to my first article on default rules, Rob Gertner and I promised to provide a theory for optimal tailoring. A close reading of that article, however, reveals that we never succeeded in providing such a theory. Although this paper will not correct that failure, I do hope to provide some partial equilibrium insights that might be helpful to others who attempt a fuller analysis. The paper also tries to relate optimal tailoring to a relatively well-developed aspect of tort theory. This aspect is often termed the degree of "precision" but also is seen under the rubric of "rules vs. standards." One of the most important treatments of this topic is Isaac Ehrlich and Richard Posner's An Economic Analysis of Legal Rulemaking. That article provides, along with many other contributions, a recurring example of the difference between rules and standards: "If we want to prevent driving at excessive speeds, one approach is to post specific speed limits and to declare it unlawful per se to exceed those limits; another is to eschew specific speed limits and simply declare that driving at unreasonable speeds is unIawful." Colin Diver and Louis Kaplow have also made substantial contributions to this literature. The articles in this "rules vs. standards" discussion attempt to identify when lawmakers should promulgate rules (specific speed limits) or standards (general requirement to drive safely).