Saturday, 9 November 2013

Distributive justice & Contracts

Adjudicating Contracts can have the appearance of giving Judges the chance to strike a blow for distributive Justice and, as Kronman pointed out thirty years ago, there is no purely legal or philosophical reason for them not to take advantage of this fact.  However, from the Economic point of view, assuming unrestricted domain and stare decesis, such intervention is likely to be highly counter-productive iff market power correlates with higher elasticity of demand or supply and there is free entry and exit into the market.
In this case, the knowledge that considerations of distributive justice obtain in a particular jurisdiction would have the effect of
1) encouraging forum shopping- bilateral contracts would migrate to distribution neutral jurisdictions to ensure privity. Unilateral contracts or contracts of adhesion would carry a risk premium, whose incidence would fall on the party with less market power, to nullify the distributional consequences of adjudication.

Over time, distribution-neutral jurisdictions would score better for equity because
2) Greater social exclusion- i.e. diminished ability to profitably contract for those with less market power. Essentially, a middle man capable of privity by, for example, making a bilateral contract in a distribution neutral jurisdiction, takes over the risk of issuing unilateral contracts to those whom the Court wishes to favor.
3) Dividing the disadvantaged into a class of short to medium term 'winners' and everybody else into permanent 'losers'. Essentially, some economic rent gets redistributed in the short run but in the long run everybody is worse off- except those with market power who have found a way to evade the jurisdiction of the Court.
Taxes, including negative taxes, aren't a perfect instrument for redistribution but they are a whole heck of a lot better than tampering with the law of contract. One possible exception is where redistribution is associated with a negative externality in which case, however, tort law is the way to go.

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