Ariel Porat

Decreasing‐Liability Contracts

Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing liability contract. To implement such a contract, we recommend deducting past expenditure on incomplete performance from liability. We show that progress payment contracts, which are commonplace in some industries, are materially equivalent to decreasing liability contracts. Our analysis should prove useful for elucidating progress payment conracts and for drafting and litigating phased contracts.

The Unconventional Uses of Transaction Costs

This article discusses the strategic advantages suppliers can derive from the transaction costs they can impose via the terms of their contracts. As the Article demonstrates, such transaction costs could be imposed by the supplier to enable the screening out of unwanted consumers, price discrimination, cartel stabilization, anticompetitive signaling, studying consumer preferences, hiding benefits granted to parties from nonparties, and creating the appearance of a fair contract. The transaction costs could also be self-imposed by the supplier, in order to signal to buyers or to competitors that negotiation of the contract would be very costly. One of the Articles conclusions concerns the legal treatment of standard form contracts. In particular, the laws concern should not be only with harsh boilerplate terms, but also with beneficial boilerplate terms. At times, beneficial boilerplate terms extract surplus from uninformed consumers, exactly as harsh terms do, but by using a different technique. Another conclusion of the Article is that boilerplate language should be carefully reviewed even when no particular terms are hidden in it, neither beneficial nor harsh, because the boilerplate provisions could be used just for the sake of artificially complicating the transaction. The Article also inquires whether the use of beneficial boilerplate terms is desirable from a social perspective, and if not, it asks how the law should discourage it.

Should Courts Deduct Nonlegal Sanctions from Damages

When legal and social norms regulate the same behavior, an act can trigger both legal and nonlegal sanctions. Should courts deduct the nonlegal sanction suffered by the wrongdoer from damages owed to the victim? We provide the answer for a legal system that seeks to minimize social costs. Nonlegal sanctions typically harm the wrongdoer and benefit other people. In principle, courts should avoid overdeterring wrongdoers by deducting the benefit of the nonlegal sanction from compensatory damages. In practice, instead of deducting the benefit of the nonlegal sanction to other people, courts should deduct the burden on the wrongdoer. Deducting the burden of the nonlegal sanction from compensatory damages typically improves the incentives of wrongdoers and victims. We make practical suggestions for courts to implement our proposal that would significantly reduce damages in torts and contracts.

Bargaining with Double Jeopardy

Virtually every burden of proof is influenced by a rule regarding relitigation. In criminal law, the prosecutor is prevented from repeatedly drawing from the urn, as it were, by the double-jeopardy rule, which reinforces the beyond-a-reasonable-doubt standard. We suggest that if law were to permit defendants to waive double-jeopardy protection, private and social benefits might follow. The benefits derive from the likelihood that prosecutors—like most people who can take a test but once—overinvest in preparation. Somewhat similarly, though far afield, deficit spending by a legislature might be linked to the fact that spending proposals that are rebuffed can be retested or revisited. We contemplate offering defendants the option of waiving their double-jeopardy protection in anticipation of reduced prosecutorial investment. Innocent defendants might then be more likely to waive, in which case there will be socially beneficial sorting of defendants.

Private Production of Public Goods: Liability for Unrequested Benefits

Suppose Owner can improve his property at a cost of 15, thereby creating benefits of 10 for himself and 10 for his Neighbors. Since each Neighbor expects to reap the benefits regardless of whether she pays Owner or not for this enhancement, all Neighbors may refuse to share the burden and the welfare enhancing activity will not take place. This paper advocates correcting this failure by recognizing an Expanded Duty of Restitution (“EDR”) that obligates recipients of benefits, under certain, well-defined conditions, to compensate benefactors for unrequested benefits voluntarily conferred upon them. Part I of the paper compares the law’s approach to harm cases with its treatment of benefit cases and offers a novel explanation as to why injurers are commonly allowed to create risks and internalize the resulting harms, while benefactors are not entitled to internalize the unrequested benefits they create. This explanation derives from the different types of obstacles that may preclude reaching agreements between injurers and victims, on the one side, and between benefactors and recipients of benefits on the other. By elucidating the differences between harm and benefit cases, and notwithstanding the explanation offered in Part I, the paper proceeds in Part II to advocate recognition of an Expanded Duty of Restitution. Here, the framework of the duty is outlined, and a wide range of examples is presented to illustrate in which cases such a duty would be warranted.This Article explores why the law treats negative externalities (harms) and positive externalities (benefits) differently. Ideally, from an economic perspective, both negative and positive externalities should be internalized by those who produce them, for with full internalization, injurers and benefactors alike would behave efficiently. In actuality, however, whereas the law requires that injurers bear the harms they create (or wrongfully create), benefactors are seldom entitled to recover for benefits they voluntarily confer on recipients without the latter’s consent (“unrequested benefits”). One aim of this Article is to explore the puzzle of the law’s differing treatment of negative and positive externalities and expose the reasons for this divergence. The Article’s novel explanation for this phenomenon is found in the different types of obstacles possibly hindering agreement between injurers and victims, on the one side, and benefactors and recipients of benefits, on the other. The Article also proposes a change to the law, with the adoption of an Expanded Duty of Restitution (“EDR”), under which, when certain conditions are met, recipients would compensate benefactors for unrequested benefits. This EDR would apply mainly to cases in which the benefits whose creation is mandated by efficiency are public goods. Public goods are characterized by their producer’s inability to exclude others from consuming the good. Thus people tend to free ride on the producer’s investment and refuse to share in the costs of producing the public good. As a result, without

A Comparative Fault Defense in Contract Law

This Article calls for the recognition of a comparative fault defense in contract law. Part I sets the framework for this defense and suggests the situations in which it should apply. These situations are sorted under two headings: cases of non-cooperation and over-reliance. Part II unfolds the main argument for recognizing the defense. It recommends applying the defense only in cases where cooperation or avoidance of over-reliance is low-cost.

Enforcing Contracts in Dysfunctional Legal Systems: The Close Relationship between Public and Private Orders: A Reply to McMillan and Woodruff

When the public order is dysfunctional, a private order for enforcing contracts will develop. The nature of the private order, its scope, and its components are inextricably related to the reasons that led to the failure of the public order and the emergence of a private order. The first part of the paper examines the relationship between the reasons for the failure of the public order and the characteristics of the private order that develops in response. Since a private order always co-exists with the public one, a question arises with regard to the interaction between them. The law operating within the public order may support the private order, repress it, or, at times, acknowledge its existence while endorsing a neutral attitude toward it. At the same time, the private order may also affect, through its own mechanisms, the character and the contents of the public order. The second part of the paper examines how the contents of the law operating within the public order might affect the concurrently existing private order. It argues, inter alia, that when a court awards damages for breach of contract within the framework of the public order, it should deduct the value of the sanction imposed by the private order on the party in breach.

Getting Incentives Right: Improving Torts, Contracts, and Restitution

Lawyers, judges, and scholars have long debated whether incentives in tort, contract, and restitution law effectively promote the welfare of society. If these incentives were ideal, tort law would reduce the cost and frequency of accidents, contract law would lubricate transactions, and restitution law would encourage people to benefit others. Unfortunately, the incentives in these laws lead to too many injuries, too little contractual cooperation, and too few unrequested benefits. Getting Incentives Right explains how law might better serve the social good. In tort law, Robert Cooter and Ariel Porat propose that all foreseeable risks should be included when setting standards of care and awarding damages. Failure to do so causes accidents that better legal incentives would avoid. In contract law, they show that making a promise often causes the person who receives it to change behavior and undermine the cooperation between the parties. They recommend several solutions, including a novel contract called “anti-insurance.” In restitution law, people who convey unrequested benefits to others are seldom entitled to compensation. Restitution law should compensate them more than it currently does, so that they will provide more unrequested benefits. In these three areas of law, Getting Incentives Right demonstrates that better law can promote the well-being of people by providing better incentives for the private regulation of conduct.

Willingness to Pay, Death, Wealth, and Damages

Willingness to Pay, Death, Wealth and Damages (November 11, 2010) American Law and Economics Review (forthcoming 2011) Ariel Porat & Avraham Tabbach * When people face the risk of death, and when they ascribe no value to their wealth post-death, they over-invest in precautions in order to reduce that risk. There are two main reasons for such over-investment. First, people under risk of death discount their risk-reduction costs by the probability of death following precautions. Second, people facing the risk of death consider the consumption of their wealth when alive to be part of their benefit from risk- reduction. From a social perspective, peoples wealth does not cease to exist after death. Therefore, discounting costs by the probability of death and taking into account the benefit of wealth-consumption are socially inefficient. But more interestingly, even from the perspective of the individual facing the risk of death, the investment in risk reduction is only optimal as a second-best alternative. We show that if markets were complete and people could contract with an annuity firm, who would inherit their assets upon death while paying them a sum of money during their lifetimes in accordance with the expected value of the inheritance, such contracts would make those people better off and, more importantly, would align the private and the social incentives to invest in risk reduction. Furthermore, we show how the insights developed in the paper should significantly change the application of Willingness to Pay (WTP) as a criterion for valuing life. In particular, we suggest that the WTP be discounted by the ex-post probability of death and that the value of life be determined irrespective of wealth. Finally, we argue that the results derived from traditional tort models for both unilateral and bilateral accidents should be substantially revised when applied to fatal accidents. In particular, we show that in bilateral accidents, contrary to conventional wisdom, negligence and strict liability rules lead to the same inefficient equilibrium. We also demonstrate how liability rules could be modified to increase efficiency. Ariel Porat is the Alain Poher Professor of Law at Tel Aviv University and Fischel-Neil Distinguished Visiting Professor of Law at the University of Chicago. Avraham Tabbach is Assistant Professor of Law at Tel Aviv University. Special thanks are due to Omri Yadlin, for helping us in developing the ideas underlying this paper, and to Steve Shavell for invaluable comments and suggestions. For very helpful comments and discussions, we thank Benjamin Alarie, Ronen Avraham, Oren Bracha, Omri Ben Shahar, Mira Ganor, Mark Geistfeld, David Gilo, Massimo D’antoni, Sharon Hannes, Alon Harel, Shelly Kreiczer-Levy, Bruce Hay, Saul Levmore, Jacob Nussim, Mitch Polinsky, Eric Posner, Ricky Revesz, Nicholas Quinn Rosenkranz, Ariel Rubinstein, Kathryn Spier, Steve Sugarman, Lior Strahilevitz, Richard Zeckhauser, the participants in workshops at the universities of Bar Ilan, Chicago, Harvard, Siena, Stanford, Texas and Yale, the participants at the Israeli Law and Economics Annual Meeting of 2010, at the NYC Tort Group at New York University, and at the Siena-Toronto-Tel Aviv Workshop in Law and Economics of 2010. Finally, we are grateful to Omer Yehezkel for providing excellent research assistance.

Disclosure Rules in Contract Law

AbstractHow does the prospect of sale affect the seller’s incentive to investigate—to acquire socially valuable information about the asset? How do the disclosure rules of contract law influence th...