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Consent and Exchange

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  • Oren Bar-Gill
  • Lucian A. Bebchuk

Abstract

In some cases, the law permits a party that unilaterally provides a benefit to another party to recover the estimated value of this benefit. Despite calls for expanding the set of cases to which such a restitution rule applies, the law commonly applies a mutual consent rule under which a party providing another with a benefit cannot obtain any recovery without securing the advance consent of the beneficiary to the transaction. We provide an efficiency rationale for the undesirability of broad use of the restitution rule by identifying significant adverse ex ante effects of the rule that are avoided by the consent requirement. Even assuming that courts' errors in estimating buyer benefits would be unbiased, a restitution rule would strengthen sellers' hand by providing them with a put option that they may but do not have to use. As a result, the restitution rule would encourage inefficient market entry by low-quality sellers that would not contribute to any efficient transactions but would be able to extract payments from buyers seeking to avoid an exchange with them. Furthermore, the restitution rule would discourage efficient market entry by some or all potential buyers of a good or service. Beyond the restitution rule, we extend our analysis to show that similar adverse effects can also arise from other "pricing" rules that provide buyers or sellers with call or put options to force an exchange at a judicially-determined price.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13267.

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Date of creation: Jul 2007
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Publication status: published as Bar-Gill, Oren and Bebchuk, Lucian A., Consent and Exchange (2007). Harvard Law and Economics Discussion Paper No. 590; Journal of Legal Studies, Vol. 39, pp. 375-397, 2010
Handle: RePEc:nbr:nberwo:13267

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  1. A. Mitchell Polinsky, 1981. "Risk Sharing through Breach of Contract Remedies," NBER Working Papers 0714, National Bureau of Economic Research, Inc.
  2. Antonio Bernardo & Eric L. Talley & Ivo Welch, 1999. "A Theory of Legal Presumptions," Yale School of Management Working Papers ysm118, Yale School of Management.
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  5. repec:rje:randje:v:37:y:2006:1:p:134-145 is not listed on IDEAS
  6. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  7. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
  8. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  9. Polinsky, A Mitchell & Rubinfeld, Daniel L, 1988. "The Welfare Implications of Costly Litigation for the Level of Liability," The Journal of Legal Studies, University of Chicago Press, vol. 17(1), pages 151-64, January.
  10. Avery Katz, 1990. "Your Terms or Mine? The Duty to Read the Fine Print in Contracts," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 518-537, Winter.
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