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Contract Law in the Welfare State: A Defense of the Unconscionablility Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract

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  • Posner, Eric A

Abstract

Conventional theories of contract law do not satisfactorily account for laws that restrict contractual freedom, such as usury laws, the unconscionability and related doctrines, and certain bankruptcy laws. Arguments that these laws protect consumers against fraud or that they redistribute wealth founder on a variety of well-known shoals. Indeed, economic theories agree that courts should enforce voluntary contracts, and wealth redistribution should occur through the welfare system. This article argues that this view overlooks distortions produced by the welfare system. The provision of welfare in a free market produces perverse incentives to take excessive credit risks, which both drive up the cost of the welfare system and undermine its goal of poverty reduction. The laws against usurious or unconscionable contracts are desirable because they deter this risky, socially costly behavior. The article also investigates evidence for the argument as a descriptive claim. Copyright 1995 by the University of Chicago.

Suggested Citation

  • Posner, Eric A, 1995. "Contract Law in the Welfare State: A Defense of the Unconscionablility Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract," The Journal of Legal Studies, University of Chicago Press, vol. 24(2), pages 283-319, June.
  • Handle: RePEc:ucp:jlstud:v:24:y:1995:i:2:p:283-319
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    File URL: http://dx.doi.org/10.1086/467961
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    Cited by:

    1. Glaeser, Edward L & Scheinkman, Jose, 1998. "Neither a Borrower nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 1-36, April.
    2. Agarwal, Sumit & Liu, Chunlin & Mielnicki, Lawrence, 2003. "Exemption laws and consumer delinquency and bankruptcy behavior: an empirical analysis of credit card data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 273-289.
    3. Guimarães, Bernardo de Vasconcellos & Salama, Bruno Meyerhof, 2017. "Contingent judicial deference: theory and application to usury laws," Textos para discussão 440, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    4. Dnes, Antony W., 2003. "Hostages, marginal deterrence and franchise contracts," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 317-331, June.
    5. repec:ces:ifodic:v:13:y:2016:i:4:p:19191579 is not listed on IDEAS
    6. repec:ces:ifodic:v:13:y:2016:i:4:p:19189881 is not listed on IDEAS
    7. Jared Rubin, 2009. "Social Insurance, Commitment, and the Origin of Law: Interest Bans in Early Christianity," Journal of Law and Economics, University of Chicago Press, vol. 52(4), pages 761-786, November.
    8. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    9. Jeffrey Traczynski, 2016. "Personal Bankruptcy and Social Insurance," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 23-27, 02.
    10. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.
    11. Michelle J. White, 2016. "Economics of Personal Bankruptcy and Insolvency," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 03-07, 02.
    12. Dnes, Antony W., 1999. "Applications of economic analysis to marital law: concerning a proposal to reform the discretionary approach to the division of marital assets in England and Wales," International Review of Law and Economics, Elsevier, vol. 19(4), pages 533-552, December.
    13. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    14. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, vol. 116(3), pages 513-527, September.
    15. Guimaraesy, Bernardo & Meyerhof Salama, Bruno, 2017. "Contingent judicial deference: theory and application to usury laws," LSE Research Online Documents on Economics 86146, London School of Economics and Political Science, LSE Library.

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