Law and the Economy II: Law in Business

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Law and the Economy IILaw in Business

• Sociology 641

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Economic Theory

• Business people will maximize profits, within the
  framework of the law
• Example Alice Bob
• Example Contracts
• Efficient breach
• Rights are bargaining endowments
• Mnookin Kornhauser Bargaining in the shadow
  of the law

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Sociological Evidence

• Informal norms
• (not formal legal rights)
• Social sanctions
• (not legal penalties)
• Moral overtones
• (not bargaining endowments)

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Macaulay, Stewart (1963), "Non-Contractual
Relations in Business A Preliminary Study," ASR
2855-66.

• How are contracts actually used by Wisconsin
  businesses?
• Findings
• Little attention to drafting contracts
• Legalism seen as sign of bad faith
• Instead, rely on
• Norms of the business community
• Goodwill in ongoing relationships
• Informal norms (until metal is cut a reliance
  standard)
• Social sanctions (gossip, ostracism)

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Contracts Amidst Non-Contractual Relations

• Contracts serve primarily as
• Symbols
• Reminders
• Exception
• Large, complex or unique transactions
• Unfamiliar outsiders

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Ellickson, Robert (1986), "Of Coase and Cattle
Dispute Resolution Among Neighbors in Shasta
County," Stanford Law Review, 38623-687.

• How do real-world farmers and ranchers deal with
  Coases problem of social cost?
• Findings
• Straying cattle are a real problem
• Open vs. Closed Range is a real issue
• But mostly symbolic politics
• Straying cattle are actually dealt with through
• Informal norms (neighborliness a negligence
  standard)
• Social sanctions (gossip, ostracism, self-help)
• Moral overtones
• Formal law is only used by (or against) city
  slickers

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Do Norms Water Down Rights?

• Hard rights ? fuzzy good conduct
• But
• Salable claims ? Abiding principles
• Economic behavior isnt purely rational