1 george mason school of law contracts i contract law in the state of nature f.h. buckley...

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George Mason School of Law

Contracts I

Contract Law in the State of Nature

F.H. Buckley

fbuckley@gmu.edu

Next Day

Vices of Capacity: A. Rational Choice B. Children

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Contract Law as a solution to bargaining problems

Suppose that the defector is penalized through legal sanctions so that the incentive to defect disappears.

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Contract Law as a solutionLeviathan

But what if we’re in a state of nature

International Law Weak rule of law Unenforceable agreements

Transaction costs of litigation

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But what if we’re in a State of Nature?1. International Law

Signing of NAFTA Treaty 1992

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But what if we’re in a State of Nature?2. Weak Rule of Law

Deputy Mayor of MoscowVladimir Resin sporting a $360,000 wristwatch

2. Weak Rule of LawMeasures of Government Corruption

2. Weak Rule of LawMeasures of Government Corruption

Transparency International

Rank Score

Denmark 1 9.3

Sweden 4 9.2

Canada 6 8.9

Australia 8 8.7

Switzerland 8 8.7

Hong Kong 13 8.4

Germany 15 7.9

Japan 17 7.8

United Kingdom 20 7.6

United States 22 7.1

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But what if we’re in a State of Nature?3. Unenforceability

Examples?

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But what if we’re in a State of Nature?Unenforceability

Marriage under no-fault Illegal Contracts Vague Contracts Social Promises

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Credible Commitments in a State of Nature: Five Strategies

1. Self-binding2. Union3. Reciprocal Altruism4. Social and Internalized Norms5. Self-enforcing agreements

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Credible Commitments1. Self-binding

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Credible Commitments1. Self-binding

I might persuade another party to trust me if I make it painful for me to breach

Doing this without contract law: The use of hostages

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Hostages: The Burghers of Calais

Rodin 1885

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Not hostages: The burgers of Calais McDonald's at Walmart, 8 South St., Calais, ME 04619

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Richard III IV.v

DERBY: Sir Christopher, tell Richmond this from me: That in the sty of this most bloody boar, My son George Stanley is frank'd up in hold: If I revolt, off goes young George's head; The fear of that withholds my present aid.

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Modern examples of hostages to solve the problem of trust in bargaining

Bankruptcy and secured lending

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Modern examples of hostages to solve the problem of trust in bargaining

Bankruptcy and secured lending

Rings

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Modern examples of hostages to solve the problem of trust in bargaining

Bankruptcy and secured lending

Rings

Romantic love

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Modern examples of hostages to solve the problem of trust in bargaining

Bankruptcy and secured lending

Rings

Romantic love

Reputations

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2. Union strategies

Allen and Lueck, The Nature of the Farm

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2. Union strategiesMarriage amongst princely families

Victoria and Albert, 1840

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2. Union strategiesVertical Integration

Armen Alchian

As a response to post-contractual opportunism:Klein, Crawford, Alchian, 21 J.L. & Econ. 297 (1978)

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Post-contractual opportunism

But see R.H. Coase, The Acquisition of Fisher Body by General Motors, 43 J.L.E. 15 (2000)

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Credible Commitments3. Reciprocal Altruism

Robert Trivers, 46 Quart. Rev. Biol. 35 (1971)

A genetic basis to reciprocal altruism?

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A genetic basis to reciprocal altruism?

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Reciprocal Altruism in Game Theory

Axelrod, The Evolution of Cooperation (1984) Tit-for-tat as a dominant strategy for

iterated PD games

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Reciprocal Altruism in Game Theory

Round 1:Cooperateor Defect

Round 2: Cooperateor Defect

Round 3: Cooperateor Defect

Round 4: Cooperateor Defect

Round 5: Cooperateor Defect

Round 6: Cooperateor Defect

Round 7: Cooperateor Defect

Round 8: Cooperateor Defect

Round 9: Cooperateor Defect

Round 10: Cooperateor Defect

Round 11: Cooperateor Defect

Round 12: Cooperateor Defect

Round 13:Cooperateor Defect

Round 14: Cooperateor Defect

Round 15: Cooperateor Defect

Round 16: Cooperateor Defect

Round 17: Cooperateor Defect

Round 18: Cooperateor Defect

Round 19: Cooperateor Defect

Round 20: Cooperateor Defect

Round 21: Cooperateor Defect

Round 22: Cooperateor Defect

Round 23: Cooperateor Defect

Round 24: Cooperateor Defect

Round 25: Cooperateor Defect

Round 26: Cooperateor Defect

Round 27: Cooperateor Defect

Round 28: Cooperateor Defect

Round 29: Cooperateor Defect

Round 30: Cooperateor Defect

Axelrod’s Iterated Prisoners’ Dilemma

The winner and loser…

Anatol Rapoport Gordon Tullock

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TFT in action: The Christmas truce of 1914 You’re a

good sort, Fritzie, for a Hun…

Ver ist der turkey? Und der

Belgians?

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TFT in action:Posner and Goldsmith on Ambassadors in International Law

Carpaccio, The Legend of St. Ursula: The Arrival of the English Ambassadors

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TFT: An Application?

America is at war with France and the Taliban. American POW’s in France are housed in

a five star hotel where they are feted with wonderful meals and fine wines.

American POW’s held by the Taliban are beheaded, every one of them.

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TFT: An Application? The Geneva Convention prescribes that

POW’s shall be provided with exercise facilities. Is America in breach of this if it offers French but

not Taliban POW’s exercise facilities?

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Example of TFT communitiesOld-boy networks

Bullington Club members, 19872. David Cameron8. Boris Johnson

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Examples of TFT communitiesAlexis Tocqueville

“Americans like to form clubs”

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Racial CommunitiesDiamond district, West 47th Street, NYC

L. Bernstein, 21 J. Legal Stud. 115 (1992)

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Credible Commitments4. Social and Internalized Norms

Ruth Benedict on shame cultures The Chrysanthemum and the Sword (1989)

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4. Social Norms

David, Andromache Mourning Hector

4. Social Norms

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Handing out the white feather

Just how long did that last?

41Lytton Strachey

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But still…

Consider the following examples of cooperative behavior: Not littering Gas Guzzlers Helping out in an emergency: the Good

Samaritan

Yet we never lack for social norms

43Lytton Strachey

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What happens when shame is internalized?

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“There is a man inside me who is angry with me”Sir Thomas Browne

Georges de la Tour, Repentant Magdalene

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Why Guilt is Good for You

If Homo Economicus Had a Choice, would he want a conscience? Robert Frank, 77 AER 593 (1987)

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Visible Guilt Solves the Lemons Problem

If Homo Economicus Had a Choice, would he want a conscience? Robert Frank, 77 AER 593 (1987)

“Speech is the gift God gave us to hide our thoughts.” Talleyrand

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Guilt Explains Why We Have Faces

Whom would you vote for?

Alexander Todorov et al., Inferences of competence from faces predict

election outcomes. Science (in press)

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Guilt Explains Why We Have Faces

Whom would you vote for?

Sen Russ Feingold (Dem. WI)

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Guilt Explains Why We Have Faces

And this time?

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Guilt Explains Why We Have Faces

And this time?

Sen. Ron Johnson (Rep. WI)

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Guilt Explains Why We Have FacesDeception detection: Guilt and Facial Signals

Paul Ekman, Darwin and Facial Expressions (1973); What the Face Reveals (1997)

Which smile is genuine?

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Guilt Explains Why We Have FacesDeception detection: Guilt and Facial Signals

Zygomatic smiles

From an evolutionary perspective, an arms race between deceptive expressions and deception detection

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Microexpressions

We are able to detect visual cues that can be seen for only a fraction of a moment

Two stable equilibria: 98 percent of the population Sociopaths who can fool the rest of us

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Microexpressions

De la Tour, The Fortune Teller

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Look at the Hands

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Microexpressions

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Look at the Hands

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Microexpressions

De la Tour, The Fortune Teller

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Microexpressions

De la Tour, The Fortune Teller

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Microexpressions

Make the Mule

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You are a plainclothes detective at LAX, charged with identifying drug smugglers as they exit a plane.

How do you pick them out?

Spot the liar

Two mothers. Which one killed her children? Mother One Mother Two

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Some Cold War History…

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In September 1945 Soviet cipher clerk Igor Gouzenko defected and told the RCMP of an espionage apparatusat the Anglo-Canadian nuclear research center in Montreal

Some Cold War History…

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Gouzenko told the RCMP that Dr. Alan Nunn May, a British scientist in Montreal, had revealed nuclear secrets to the Soviets and provided them with samples of U-233 and U-235—a few days after Hiroshima

Some Cold War History…

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The RCMP passed on the information to MI-5

Some Cold War History…

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Which assigned it to their head of Soviet Counter-Intelligence…Kim Philby

Kim Philby

Philby 1

Philby 2

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5. Self-enforcing agreements

Suppose that the anticipated gains from the relationship in the future exceed the temptation to defect in every single period

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Cooperate Defect

Cooperate 3, 3 -1, 4

Defect 4, -1 0, 0

Player 2

Player 1

Payoffs in a one-period PD Game

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Cooperate Defect

Cooperate 30, 30 -1, 4

Defect 4, -1 0, 0

Player 2

Player 1

Payoffs in an iterated PD Game

5. Self-enforcing agreements

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The Special Relationship (R.I.P)

0oops…I forgot a sixth enforcement strategy in the state of nature

Can you think what it might be?

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Meet Nick the Chin

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I’m tinkin’ youse should pay what youse owe

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But contract law persists (happily)

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The advantages of Contract Law over Self-binding Strategies

Contract Law frees up assets, as opposed to hostages

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The advantages of Contract Law over Social and Internalized Norms

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Everybody lies…

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The advantages of Contract Law over Reciprocal Altruism and Self-enfocement

One-shot deals and end-period misbehavior

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The advantages of Contract Law over Union Strategies

Democratic and open to outsiders

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The advantages of Contract Law over Union Strategies

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The “amoral familism” of Montegrano

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The advantages of contract law

Sir Henry Maine: “The movement of the progressive societies has hitherto been a movement from Status to Contract.”

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Commerce and the New Man

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“Take the view of the Royal Exchange in London, a place more venerable than many courts of justice. There the Jew, the Mahometan, and the Christiantransact together, and the name of infidel is given to none but bankrupts.”

Voltaire, Letters on the English, Letter VI

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Le doux commerce

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“Commerce cures destructive prejudices;And it is almost a general rule that wherever there are gentle morals (mœures douces) there is commerce; and wherever there is commerce there are gentle morals.”

Montesquieu, The Spirit of the Laws II, book XX, Pléiade 585

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Tom Friedman’s Macdonald’s Rule:The Lexis and the Olive Tree

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But if the spirit of commerce unites nations, it does not in the same manner unite individuals. We see that in countries where the people move only by the spirit of commerce, they make a traffic of all the humane, all the moral virtues; the most trifling things, those which humanity would demand, are there done, or there given, only for money.

Is there a trade-off?

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George Mason School of Law

Contracts I

Illegality: Perfectionism

F.H. Buckley

fbuckley@gmu.edu