1 / 74

George Mason School of Law

George Mason School of Law. Contracts I Bargaining Gains F.H. Buckley fbuckley@gmu.edu. Next Day. Montesquieu John Stuart Mill, On Liberty Scott 480-501. Up to now. Let’s assume that societal wealth has something to do with national happiness. Up to now.

ted
Download Presentation

George Mason School of Law

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. George Mason School of Law Contracts I Bargaining Gains F.H. Buckley fbuckley@gmu.edu

  2. Next Day • Montesquieu • John Stuart Mill, On Liberty • Scott 480-501

  3. Up to now • Let’s assume that societal wealth has something to do with national happiness

  4. Up to now • And does contract enforceability have something to do with societal wealth?

  5. Where does contract law come in? • What is the relationship between enforceable promises and wealth?

  6. Bargains as a Prisoner Dilemma game Player 2 Player 1

  7. Defection dominates for both Players Player 2

  8. Contract Law as a solution • Suppose that the defector is penalized through legal sanctions so that the incentive to defect disappears.

  9. Why Enforce Contracts:An Economic Analysis of Bargaining Gains

  10. Modeling Bargaining Gains • Indifference Curves • The Budget Line • Consumer Choice • Beneficial Reliance • The Edgeworth Box Function • Pareto-Superiority and Pareto-Optimality

  11. Two dimensional Commodity Space:Every point represents a combination of the two commodities Y axis Commodity y X axis 0 Commodity x

  12. Two dimensional Commodity Space:Every point represents a combination of the two commodities Y axis A • Y* X axis 0 X* 13

  13. The Commodities: Dollars in Two Time Periods Dollars in Time 1 A • Y* Dollars in Time 2 0 X* 14

  14. Two different time preferences (Which is right?)

  15. Commodity space:Dollars consumed in two time periods Dollars in Time 1 More of both Dollars in Time 2 0

  16. The Budget Line: Allocating $100 between two periods Dollars in Time 1 100 The budget line in red represents every trade-off of $100 in two periods Dollars in Time 2 0 100

  17. Indifference Curves: Preferences about Consumption Dollars in Time 1 An indifference curve represents a set of trade-offs to which the subject is indifferent Dollars in Time 2 0

  18. Indifference Curves: Preferences about Consumption Dollars in Time 1 Convexity (curve bends inward) assumes decreasing marginal utility Dollars in Time 2 0

  19. Decreasing marginal utility: We’ll always want more, but will enjoy each new scoop less and less

  20. A  C: Subject is willing to give up $BC in Time 2 for $AB in Time 1 Dollars in Time 1  A B   C 0 Dollars in Time 2  = “is indifferent to”

  21. A  C: Subject is willing to give up $BC in Time 2 for $AB in Time 1 Dollars in Time 1  A B   C 0 Dollars in Time 2

  22. Indifference Curves: Preferences about Consumption Dollars in Time 1 One is better off the further one gets from the origin Dollars in Time 2 0

  23. More is better:I2 > I1 Dollars in Time 1 More is better I2 I1 0 Dollars in Time 2

  24. Ordinal Utility:We can’t say how much better I2 is than I1 Dollars in Time 1 I3 I2 I1 0 Dollars in Time 2

  25. Ordinal Utility:We can’t say how much better I2 is than I1 Ordinal numbers: First, second, third

  26. Ordinal Utility:We can’t say how much better I2 is than I1 Ordinal numbers: First, second, third Cardinal numbers: 1,2, 3

  27. Consumption Decision:Uncle Ebenezer gives David $100 Time 1 I 2 I 1 100 I 2 I 1 I3 0 100 Time 2

  28. Consumption Decision:David has $100 and is best off at AMaximization subject to the constraint of the Budget Line Time 1 I 2 I 1 100 A 50  I 2 I 1 I3 0 50 100 Time 2

  29. Consumption Decision:David has $100 and is best off at AMaximization subject to the constraint of the Budget Line Time 1 I 2 I 1 100 A 50  I B  2 I 1 B is not optimal I3 0 50 100 Time 2 30

  30. Consumption Decision:David has $100 and is best off at AMaximization subject to the constraint of the Budget Line Time 1 I 2 I 1 100 C is not feasible  C A 50  I B  2 I 1 B is not optimal I3 0 50 100 Time 2 31

  31. Ebenezer gives David another $100:The Shift to a New Budget Line 200 I 200 I 100 100 A 50, 50 50 0 100

  32. A new Consumption Decision Time 1 B 100, 100 100 I 200 A 50, 50 50 I 100 I DR Time 2 0 50 100

  33. What happens when the donor promises to give in the future? • Uncle Ebenezer doesn’t have the $100 to give today but promises to give it to David in the next period • What Should David Do?

  34. What happens when the donor promises to give in the future? • Uncle Ebenezer doesn’t have the $100 to give today but promises to give it to David in the next period • David’s election: to rely or not to rely on the promise in the first period

  35. The good scenario:David relies and Ebenezer performs 200 Reliance by David means spending $100 in period 1 B 100, 100 100 I 200 A 50, 50 50 I 100 200 0 50 100

  36. A bad scenario: Detrimental Reliance:David relies and Ebenezer breaches Time 1 David spends 100 in period 1 and now has nothing left to spend in period 2 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

  37. A bad scenario: Detrimental Reliance:David relies and Ebenezer breaches Time 1 What do we need to give David to make him as well off as he would be had the promise been performed? C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

  38. A bad scenario: Detrimental Reliance:David relies and Ebenezer breaches Time 1 The Expectation Interest is CB, or $100 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

  39. A bad scenario: Detrimental Reliance:David relies and Ebenezer breaches Time 1 What do we need to give David to make him as well off as he would have been had the promise not been made, or had he not relied? C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

  40. A bad scenario: Detrimental Reliance:David relies and Ebenezer breaches Time 1 The Reliance Interest is CD, or about $25 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

  41. Fool me once…: Non-reliance:David assumes Ebenezer will breach Time 1 I 1 100 50 B I Now David spends only 50 in period 1 1 0 50 100 Time 2

  42. Fool me once…: Non-reliance:Ebenezer breaches: No harm, no foul Time 1 I 1 100 50 B I Now David spends only 50 in period 1 1 0 50 100 Time 2

  43. Loss of Beneficial Reliance:David doesn’t rely and Ebenezer performs Where David is on performance 100 I 200 E Ino-reliance 150, 50 50 David spends only 50 in period 1 0 100 150 Goetz and Scott, 89 Yale L.J. 1261 (1980)

  44. Loss of Beneficial Reliance:David doesn’t rely and Ebenezer performs Where David would have been had he relied B 100, 100 100 I 200 E Ino-reliance 150, 50 50 David spends only 50 in period 1 0 100 150 Goetz and Scott, 89 Yale L.J. 1261 (1980)

  45. Loss of Beneficial Reliance:David doesn’t rely and Ebenezer performs B 100, 100 100 I 200 E Ino-reliance 150, 50 50 0 100 150 Goetz and Scott, 89 Yale L.J. 1261 (1980)

  46. Enforceable Contracts provide the gains associated with beneficial reliance

  47. Now: How parties gain from contracting “If one person does not lose, the other does not gain.” St. Augustine

  48. Modeling a Bargain:Mums and Roses Mums 0 Roses

  49. Two bargainers Mums Mums Mary Roses Bess Roses

More Related