A Bargaining Power Theory of Default Rules
Abstract
This Essay explores the merits of a new criterion for default rules in incomplete contracts: filling gaps with terms that are favorable to the party with the greater bargaining power. It argues that some of the more common gaps in contracts involve purely distributive issues, such as the contract price, for which it is impossible to choose a unique, joint-maximizing, "most efficient" term. Instead, the term that mimics the hypothetical bargain in these settings must be sensitive to the bargaining power of the parties-the term they would have chosen to divide the surplus in light of their relative bargaining strengths. This Essay explores the justifications for such a bargain- mimicking principle, the ways in which it could be implemented by courts, and the subtle ways it is already in place.
