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The Status Quo Bias and Contract Default Rules

Interesting read.

In an ideal world, contracts would explicitly allocate rights and responsibilities between contracting parties for all possible contingencies that might arise over the life of the contract.

In reality, of course, contracting parties cannot foresee all possible contingencies that might bear on the operating of the contract. Furthermore, preparing for all foreseeable contingencies, no matter how remote, can both be difficult and costly. Consequently, all but the simplest contracts are, to some extent, obligationally incomplete—there are gaps in the contract’s explicit and implicit provisions that leave the parties’ obligations unspecified under certain contingencies. It falls to public institutions to create background, or “default,” rule to govern private relationships when such contingencies are unaddressed in the contract.

Abstract

The rich law and economics literature on contract default rules – that is, terms that govern relationships between contracting parties only if those parties do not explicitly agree to other terms – presumes that the legal system’s choice of default rules will not affect individual negotiators’ underlying preferences for contract terms. Judgment and decision making literature on the “status quo bias” suggests that if bargainers perceive default terms as part of the status quo they will prefer the substantive content of those terms more than they would if other terms were the legal defaults. This paper presents a study designed to test this hypothesis.

151 law students were asked to provide advice to a client in a number of hypothetical contract negotiation scenarios with the content of the default terms manipulated between experimental groups. The results suggest that the choice of legal default terms affects not only what terms contracting parties will agree upon but also what terms they actually prefer. The paper presents the experimental results, considers various theoretical explanations for the results, and suggests how the results should impact legal scholars’ analysis of what contract default rules are optimally efficient.

Link