We arrived today at an issue--two, really--that had been bothering me for some time. The issue is this: what is to be done to discourage people from breaking contracts? (its correlative issue is "why are we disregarding the costs--court, transaction, etc.--that attend such a breach?)

Holding, as I do, the social paternalist chair in our class, I am obligated to ask what incentives the law does and should provide for proper behavior (in this case, upholding agreements). I'm also constrained to wonder what the appropriate punishments should be for people who fail to exhibit proper behavior, and whether that punishment should lie within the law, or within society in general, or both.

It seems to me that the law's main incentive for upholding contracts is that the would-be breacher avoids court costs and lost time. Societal incentives include the maintenance of his or her good name, or of her husband's, in the case of the poor widow (we paternalists just eat that stuff up).

On the other hand, the law's main sanctions against breachers are monetary damages or specific performance, court costs, and lost time. Society frowns upon the breacher, to the extent that the breach is critical and public.

Professor Lessig, in his story about the Austrian, began to discuss the societal sanction. I think it's tremendously important that this sanction exist, and that it continue to serve much the same end that the societal sanction against careless promissors serves.

So that's all fine, and we have the Better Business Bureau, and things like that.

But then the somewhat sterner side of the social paternalist pipes up: "hang on there! The ...uh... breachee... suffers costs! Breachees have to go to court, have to spend money, have to lose time, and may have lost out on a good deal somewhere! Even if we award damages based on expectation, aren't we critically neglecting many of these costs? Can't I punish the breacher some more?"

You see, the sterner side of the social paternalists yearns for the days of pillories in the town square. But at the same time, it has a legitimate concern for its poor, trusting subject, wronged by a charlatan and left to whimper in the fetal position on the floor of the stock exchange.

So, in the words of a social paternalist of the worst sort, "what should we be doing?" Should we award court costs, and figure out damages for time spent in the courtroom? It seems that that would encourage all sorts of nasty behavior in itself--running up expenses, wasting time, etc. But if not that, and if it's intolerable to let the poor breachee suffer, then what?

Thanks,

Paul

-- Anonymous, October 21, 1998

Answers

All you paternalist sorts make all sorts of assumptions about the costs to society from the breach. Is there a cost to society if there is no breach?

-- Anonymous, October 25, 1998

Paul -

I don't have an answer to your question, but I also wanted to express some uneasiness with the incentive structure of money damages that we've been discussing in class.

I'm not exactly sure how to phrase this, but there seems to be an inherent good in the ability to have contracts honored. From our discussion the implication seemed to be that as long damages were paid, the victim of the breach was as well off as she would have been had either the contract never happened or had the contract happened and been honored.

I think this approach ignores the harm done to society as a whole. When I contract with someone, I am not just judging the other party's reputation for being an honorable person, nor I am merely judging the other party's potential incentives for breaching our contract, I am also relying on a general social expectation that contracts are honored in my society. Society on the larger level partly rests on the good dealings between its members; a society cannot function properally (I don't think) if money damages is the glue that binds. In addition, money damages do not repair the breach to the general social fabric that occurs when people do not feel secure in entering into conracts with their fellow citizens.

I guess what I am saying is that our discussion seemed to focus only on the individual level, but there seems to be macro-social costs that are serious. I would like to have talked in class (well, not me personally) about the incentives that can be drawn to prevent contracts from being breached in response to this societal concern.

Does this make sense? I think I am going to also post this as a question (if I can figure out how, to see what others think).

-- Anonymous, October 25, 1998

Breaches and costs

Of course there are costs to society if breaching is not allowed to take place. The economists whose assumptions (zero transaction costs, etc.) control the class at the moment have taken pains to remind us that breaching sometimes leads to a more efficient outcome. All we "paternalist sorts" are is a small chorus of voices crying out for justice and responsibility to be given a place at the discussion of costs.

Paul

-- Anonymous, October 25, 1998