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Default rules.

At the very beginning of my law & economics experience --I was attending Posner's class in 1976--, one thing, concerning the economic analysis of contract law, struck me as particularly impressive: the keen perception of the public good nature of contract law (in Schwartz's words, "the costs that any set of parties will incur to devise a term that resolves a possible dispute may exceed the parties' gain...thus, the state can increase welfare by supplying efficient solutions --that is, legal rules-- to recurrent contracting problems": the focus is apparently restricted to legislative law making, but it should be evident that the judicial system, whose costs the parties do not bear in full but are subsidized by the state, produces legal rules: both the former and the latter represent default rules).

This idea was captured, in the first version of Posner's handbook, both by a rather ambiguos notation about the first-ranking goal of contract law, the maintenance of appropriate incentives, and by the more appealing suggestion that the relevant discipline aims to compress transaction costs. Beyond the obvious recognition that parties should be deterred from resorting to opportunistic behavior, such as reneging the promise after receiving consideration, it was apparent that even in a civil law environment, the pertinent rules are shaped and made operative through their application by the courts. Rationality dictates, with some qualifications which I will ignore for the sake of brevity, that litigation is not undertaken if its outcome is known from the outset. There must be some margin for uncertainty. And this means, among other things, that, adjudicating a controversy, a court is not only assigning the stakes between plaintiff and defendant, but is also transmitting signals to the classes of would-be plaintiffs and defendants who confront themselves with the same kind of problems. The learning part of the phenomenon: so I used to call it, employing a loose label that the new generation of complexifiers, like Michael Klausner, would contest, reserving it to the narrower hypothesis of the adoption of terms commonly used in the past and already clarified by precedents. At any rate, the learning effect is, in a sense, even more important than the adjudicatory one: the parties in the litigation have already played their match and can only wait for the consequences of their actions, whereas the countless addressees of the rule being enacted by the court will get the opportunity of modelling their initiatives according to the law as it stands.

As I already remarked, this perception struck me as extremely sensitive. It helped me to realize the question submitted to the court cannot be considered in a purely contextual framework. A case-by-case adjudication is frequently invoked by lawyers as the best way to approach a fair result; but, leaving aside the administrative costs of this otherwise alluring perspective, it overlooks that such a way of administering justice conflicts with the hard task of offering people the opportunity to make rational choices. Not only. It probably fails the noble objective of propitiating a more equitable application of the law: assuming that, as a judge, I am moved by the distressed condition of a poor widow with too many children, defaulting on her lease, I will probably contribute to worsen the destiny of the crowd of the unfortunate women living in the same situation, since lessors will skeep dealing with them at all (another way of telling the old story of hard cases which make bad law).

Shortly. The law in action fixes the rules of the game. Rules that do count especially for those who still have the opportunity to mold their initiatives, either discounting the impact of those rules, or contracting around them, when they are perceived as impalatable. In other words, contract law makes its best in drawing the coordinates that rational actors will consider while adopting, needles to say ex ante, their contractual decisions. This approach widens the framework the judge is to evaluate when rendering his or her opinion; and makes credible the much criticized argument according to which assuming the economic man --that is, a rational one, acting on the basis of precise incentives-- as point of departure for legal reasonig is not condemned to produce a Frankenstein-like justice in the (more or less) empty cabinet of Doctor Calabresi, and the like, but, on the contrary, may contribute to delineate a more robust path to a virtuose administration of the law.

In my opinion, the emphasis on this aspect --that could be presented in different forms, all pointing towards the same conclusion, i.e. contract law teaches to people, planning to interact with someone else in the market, how to pursue and preserve their interests-- was one of the most important achievements of the economic analysis applied to the field. In fact, an impressive line of developments has been derived from this root; I will resist the temptation to enlist them, because they constitute the bright side of the moon, subject to everybody's inspection, and the very reason for the persistence of a legal movement that many less-than-true believers would have cheerfully buried before even attempting to pay the price necessary to understand the logic of its claims.

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