HEALTH WARNING: THIS IS A LONG RAMBLING MESSAGE THAT CAME OUT OF MY NOTES FOR ZEMAN. I AM LOOKING FOR SOME FEEDBACK ON A COUPLE OF IDEAS, BUT READ AT YOUR OWN PERIL (I.E. LOONG AND INARTICULATE) thanks to anybody who bothers to read it and write back. aa.

i played around with a few hypotheticals, and am starting to think that perhaps the enforcement of promises among repeat players should be left to the market, and we should devote the courts' attention to widows & Co.

We are working to maximize some of our desiderata, which i understand to include * that cases of reliance made on spurious promises or inexistent contracts should not be enforced (add all the qualifications you wish) * that cases of justified reliance should find enforcement in the court room.

The first clause seems to deter action by the promisee (e.g. Zeman), who is not willing to go forward unless he has a signed agreement, whereas pre-law he would have done so.

The second clause deters promisors (e.g. Lufthansa)m who now feel, unlike before, that they cannot risk their luck by strtching negotiations and then backing off.

Which prings us to the third clause we are trying to maximize: contracting behavior, or business activity, or economic development. This third clause squares off the preceding two and, i hold, leaves little way for a court to do a good job without frustrating activity or the desiderata of justice.

Consider the following case:

LH goes to ten different contractors with the same offer to lease their structures if they will be ready by a certain date. all ten try their best to make the deadline. one of them gets it, the other nine are stuck dry. this, i believe, strikes all as unjust. still, it seems to be the one that best fosters competition (one you are in the contract, in a sense you hold a monopoly over the specific activity). how could we take the injustice away?

let's say that for this specific market (for ten specific rooms on specific dates), LH now is a monopsonist. Knowing its discretionary behavior, none of the ten contractors is willing to run the risk, and they all refuse to go ahead with the improvements absent a written confirmation that [one of them] will receive the deal. compelling LH to sign with one of them only seems to maximize the use of resources (you don't end up with ten different LH-specified houses that can be used for nothing else). should this compulsiuon, though, come from the ex ante efforts of some court (potentially limited to anchorage) or should it be a more generalized, market-driven incentive?

Assuming that both LH and the contractors are repeat players, one would assume also that the costs that would lead to an informed decision are relatively low. i can't convince myself of that, as i was saying in class today: the costs of parallel bargaining add a risk to the enterprise, so that Zeman & Co., who would otherwise require a signature before getting started, cannot do so under the monopsonist conditions imposed by LH, and have to go ahead with whatever certainties they can get. I think that under these conditions, with the costs of a signature unbearably high (i.e., impossible to get that from LH), the promisee would settle for whatever certainty he can get (second-best contracting), with the result that if he gets screwed over he has to go to court to enforce what he deemed sufficient assurance. Now multiply this for all ten players, with LH walking the line in such a way as to give each sufficient assurance to go ahead with the project and none of them sufficient assurance to enforce it in court. It's a mess, and it does not strike me as particularly fair. there is opportunistic behavior by LH.

Now let's get rid of the monopoly and the monopsony to see how they would operate in light of the above. we now have ten contractors and ten airlines. how are they going to contract so that each of them gets what it wants? would a market still obtain in which each of the airlines and each of the contractors pulls LH's trick on each other? if it did work, i don't think it would maximize the use of the resources. how can we change it in such a way that it does? can we do it without legal coercion?

we seem to be touching at the core of the competitive behavior of a clearing market. but the tremendous transaction costs are blocking the whole thing--incentive to finish work on time goes down if you sign; incentive to even start building approaches zero if you do not sign and think you will never collect.

we can end up with pilots sleeping in the street or ten empty buildings to LH specifications. Section 90 does not seem to me to solve a problem unless it is made to take into account the costs of information in the gamble. no one can possibly hold that each of the ten contractors in the first hypothetical was building in reliance to LH's promise, and yet justice can be served only by paying them (i think). they had enough information/doubt not to go on building (reliance was meager) and not enough information to know not to build (either they bagged it and went ahead with the project under LH's non-committal terms, or there would have been no bulding at all).

what is to be done?

-- Anonymous, October 05, 1998