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