I started this as an answer to Paul's question, but now it seems more like a question of my own. I would love any feedback you might have on the thoughts below. I am still sort of teasing them out, so they may not be particular clear.

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?

-- Anonymous, October 25, 1998

Answers

Me too! This is exactly where we want to get. So what *are* the harms at the social level from contract breaching behavior?

-- Anonymous, October 25, 1998

What are the social costs? Well, my immediate response is that society derives a portion of its vitality and durability from the sense of community and common purpose that it creates. In order to feel like a part of a community, I think you need to feel a sense of confidence and security in the other members. People like being around and associating themselves with people who deserve their respect (you are the company you keep). If people feel like their neighbors on untrustworthy or dishonorable, they may seek to disassociate themselves from them, breaching this sense of community and common identity.

A second social cost might be that a society runs on contracts. People contract everyday with one another for large and small reasons. Although one might argue that people should meticulously craft every contract, that's just not the way a society works. People enter formal contracts, but I think they are relying less on the provisions of the contract and more on a general sense that contracts should be honored in acting on the terms of contracts. If this expectation changes, and people now expect breaches, society will be encumbered with all of this extra formalism and distrust. Interactions will slow down -- both in the commercial and interpersonal sector.

The last one that I think of right now is that when a contract is breached, even if damages are paid, that individual must now spend some time either entering a new contract and/or litigating. Society cannot afford to have its members always tied up in the litigation process or redoing the same contract over and over. This isn't just transaction costs (I know we're not allowed to talk about those!), it's more the fact that we don't do many things entirely on our own. We are constantly relying on each other for the most basic activities. Society would grind to a halt if too many of these transactions break down or become too litigious.

Most of us are not repeat players. We depend on one another to make contracts mean something. An incentive structure that undermines this expectation doesn't sit right with me. I have to think about this more to really spell out the social costs, but I'm convince they are there.

-- Anonymous, October 25, 1998