STRATEGIC CONTRACTUAL INEFFICIENCY AND THE OPTIMAL CHOICE OF LEGAL RULES

In this Article the authors explore the inefficiencies that may arise from strategic bargaining when one party to a contract has private information and the other side has some market power. The contracting parties' reluctance to reveal private information can cause these inefficiencies to persist even when parties can costlessly contract around known defaults. The introduction of even slight contracting cost can dramatically exacerbate the inefficiencies of strategic bargaining. In such a world, the costs of choosing an inefficient default can be significantly larger than the costs of contracting around the default. Small contracting costs also multiply the number of potential equilibria. For these reasons, setting efficient default rules in even relatively simple settings of strategic bargaining is an extraordinarily complex process. The efficient rule will depend upon the precise determination of a variety of subtle underlying variables; variables which lawmakers will likely be incapable of determining with the requisite precision.