George Mason School of Law
Contracts I
Contract Law in the State of Nature
F.H. Buckley
fbuckley@gmu.edu
1
Next Day
 Vices of Capacity:
 A. Rational Choice
 B. Children
2
Contract Law as a solution to
bargaining problems
 Suppose that the defector is
penalized through legal sanctions so
that the incentive to defect
disappears.
3
Contract Law as a solution
Leviathan
4
But what if we’re in a state of
nature
 International Law
 Weak rule of law
 Unenforceable agreements
 Transaction costs of litigation
5
But what if we’re in a State of Nature?
1. International Law
Signing of NAFTA Treaty 1992
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But what if we’re in a State of Nature?
2. Weak Rule of Law
Deputy Mayor of Moscow
Vladimir Resin
sporting a $360,000
wristwatch
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2. Weak Rule of Law
Measures of Government Corruption
2. Weak Rule of Law
Measures of Government Corruption
Rank
Score
Denmark
1
9.3
Sweden
4
9.2
Canada
6
8.9
Australia
8
8.7
Switzerland
8
8.7
Hong Kong
13
8.4
Germany
15
7.9
Japan
17
7.8
United Kingdom
20
7.6
United States
22
7.1
Transparency International
But what if we’re in a State of Nature?
3. Unenforceability
 Examples?
10
But what if we’re in a State of Nature?
Unenforceability




11
Marriage under no-fault
Illegal Contracts
Vague Contracts
Social Promises
Credible Commitments in a State of
Nature: Five Strategies
1.
2.
3.
4.
5.
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Self-binding
Union
Reciprocal Altruism
Social and Internalized Norms
Self-enforcing agreements
Credible Commitments
1. Self-binding
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Credible Commitments
1. Self-binding
 I might persuade another party to
trust me if I make it painful for me to
breach
 Doing this without contract law: The
use of hostages
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Hostages: The Burghers of Calais
Rodin 1885
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Not hostages: The burgers of Calais
McDonald's at Walmart, 8 South St., Calais, ME 04619
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Richard III IV.v
 DERBY: Sir Christopher, tell Richmond
this from me: That in the sty of this most
bloody boar, My son George Stanley is
frank'd up in hold: If I revolt, off goes
young George's head; The fear of that
withholds my present aid.
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Modern examples of hostages to solve
the problem of trust in bargaining
 Bankruptcy and secured lending
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Modern examples of hostages to solve
the problem of trust in bargaining
 Bankruptcy and secured lending
 Rings
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Modern examples of hostages to solve
the problem of trust in bargaining
 Bankruptcy and secured lending
 Rings
 Romantic love
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Modern examples of hostages to solve
the problem of trust in bargaining
 Bankruptcy and secured lending
 Rings
 Romantic love
 Reputations
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2. Union strategies
Allen and Lueck, The Nature of the Farm
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2. Union strategies
Marriage amongst princely families
Victoria and Albert, 1840
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2. Union strategies
Vertical Integration
As a response to
post-contractual
opportunism:
Klein, Crawford,
Alchian, 21 J.L. &
Econ. 297 (1978)
Armen Alchian
24
Post-contractual
opportunism
But see R.H. Coase, The
Acquisition of Fisher Body
by General Motors, 43
J.L.E. 15 (2000)
25
Credible Commitments
3. Reciprocal Altruism
A genetic basis
to reciprocal altruism?
Robert Trivers,
46 Quart. Rev. Biol. 35 (1971)
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A genetic basis to reciprocal
altruism?
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Reciprocal Altruism in Game Theory
 Axelrod, The Evolution of
Cooperation (1984)
 Tit-for-tat as a dominant strategy for
iterated PD games
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Reciprocal Altruism in Game Theory
Round 1:
Cooperate
or Defect
Round 2:
Cooperate
or Defect
Round 3:
Cooperate
or Defect
Round 4:
Cooperate
or Defect
Round 5:
Cooperate
or Defect
Round 6:
Cooperate
or Defect
Round 7:
Cooperate
or Defect
Round 8:
Cooperate
or Defect
Round 9:
Cooperate
or Defect
Round 10:
Cooperate
or Defect
Round 11:
Cooperate
or Defect
Round 12:
Cooperate
or Defect
Round 13:
Cooperate
or Defect
Round 14:
Cooperate
or Defect
Round 15:
Cooperate
or Defect
Round 16:
Cooperate
or Defect
Round 17:
Cooperate
or Defect
Round 18:
Cooperate
or Defect
Round 19:
Cooperate
or Defect
Round 20:
Cooperate
or Defect
Round 21:
Cooperate
or Defect
Round 22:
Cooperate
or Defect
Round 23:
Cooperate
or Defect
Round 24:
Cooperate
or Defect
Round 25:
Cooperate
or Defect
Round 26:
Cooperate
or Defect
Round 27:
Cooperate
or Defect
Round 28:
Cooperate
or Defect
Round 29:
Cooperate
or Defect
Round 30:
Cooperate
or Defect
Axelrod’s Iterated Prisoners’ Dilemma
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The winner and loser…
Anatol Rapoport
Gordon Tullock
TFT in action:
The Christmas truce of 1914
Ver ist der
turkey?
Und der
Belgians?
31
You’re a
good sort,
Fritzie, for
a Hun…
TFT in action:
Posner and Goldsmith on Ambassadors in
International Law
32
Carpaccio, The Legend of St. Ursula:
The Arrival of the English Ambassadors
TFT: An Application?
 America is at war with France and the
Taliban.
 American POW’s in France are housed in
a five star hotel where they are feted
with wonderful meals and fine wines.
 American POW’s held by the Taliban are
beheaded, every one of them.
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TFT: An Application?
 The Geneva Convention prescribes that
POW’s shall be provided with exercise
facilities.
 Is America in breach of this if it offers French
but not Taliban POW’s exercise facilities?
34
Example of TFT communities
Old-boy networks
Bullington Club members,
1987
2. David Cameron
8. Boris Johnson
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Examples of TFT communities
Alexis Tocqueville
“Americans
like to form
clubs”
36
Racial Communities
Diamond district, West 47th Street, NYC
L. Bernstein, 21 J. Legal Stud. 115 (1992)
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Credible Commitments
4. Social and Internalized Norms
 Ruth Benedict on shame cultures
 The Chrysanthemum and the Sword (1989)
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4. Social Norms
David, Andromache
Mourning Hector
39
4. Social Norms
Handing out
the white feather
40
Just how long did that last?
41
Lytton Strachey
But still…
 Consider the following examples of
cooperative behavior:
 Not littering
 Gas Guzzlers
 Helping out in an emergency: the Good
Samaritan
42
Yet we never lack for social norms
43
Lytton Strachey
What happens when shame is
internalized?
“There is a man
inside me who
is angry with me”
Sir Thomas Browne
44
Georges de la Tour,
Repentant Magdalene
Why Guilt is Good for You
 If Homo Economicus Had a Choice,
would he want a conscience?
 Robert Frank, 77 AER 593 (1987)
45
Visible Guilt Solves the Lemons Problem
 If Homo Economicus Had a Choice,
would he want a conscience?
 Robert Frank, 77 AER 593 (1987)
 “Speech is the gift God gave us to hide
our thoughts.” Talleyrand
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Guilt Explains Why We Have Faces
Whom would you vote for?
Alexander Todorov et al., Inferences of competence from faces predict
election outcomes. Science (in press)
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Guilt Explains Why We Have Faces
Whom would you vote for?
Sen Russ Feingold (Dem. WI)
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Guilt Explains Why We Have Faces
And this time?
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Guilt Explains Why We Have Faces
And this time?
Sen. Ron Johnson (Rep. WI)
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Guilt Explains Why We Have Faces
Deception detection: Guilt and Facial Signals
Which smile is genuine?
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Paul Ekman, Darwin and Facial Expressions (1973);
What the Face Reveals (1997)
Guilt Explains Why We Have Faces
Deception detection: Guilt and Facial Signals
From an evolutionary
perspective, an arms race
between deceptive
expressions and
deception detection
Zygomatic smiles
52
Microexpressions
 We are able to detect visual cues that
can be seen for only a fraction of a
moment
 Two stable equilibria:
 98 percent of the population
 Sociopaths who can fool the rest of us
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Microexpressions
De la Tour, The Fortune Teller
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Look at the Hands
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Microexpressions
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Look at the Hands
57
Microexpressions
De la Tour, The Fortune Teller
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Microexpressions
De la Tour, The Fortune Teller
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Microexpressions
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Make the Mule
You are a plainclothes
detective at LAX,
charged with identifying
drug smugglers as they
exit a plane.
How do you pick them
out?
61
Spot the liar
 Two mothers. Which one killed her
children?
 Mother One
 Mother Two
62
Some Cold War History…
In September 1945 Soviet
cipher clerk Igor Gouzenko
defected and told the RCMP
of an espionage apparatus
at the Anglo-Canadian nuclear
research center in Montreal
63
Some Cold War History…
Gouzenko told the RCMP that Dr. Alan Nunn May,
a British scientist in Montreal, had revealed
nuclear secrets to the Soviets and provided them
with samples of U-233 and U-235—a few days
after Hiroshima
64
Some Cold War History…
The RCMP passed on the information to MI-5
65
Some Cold War History…
Which assigned it to
their head of Soviet
Counter-Intelligence…
Kim Philby
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Kim Philby
 Philby 1
 Philby 2
67
5. Self-enforcing agreements
 Suppose that the anticipated gains
from the relationship in the future
exceed the temptation to defect in
every single period
68
Payoffs in a one-period PD Game
Player 2
Player 1
69
Cooperate
Defect
Cooperate
3, 3
-1, 4
Defect
4, -1
0, 0
Payoffs in an iterated PD Game
Player 2
Player 1
70
Cooperate
Defect
Cooperate
30, 30
-1, 4
Defect
4, -1
0, 0
5. Self-enforcing agreements
The Special Relationship (R.I.P)
71
0oops…
I forgot a sixth enforcement strategy in the
state of nature
 Can you think what it might be?
72
Meet Nick the Chin
I’m tinkin’
youse
should pay
what youse
owe
73
But contract law persists
(happily)
74
The advantages of Contract Law over
Self-binding Strategies
 Contract Law frees up assets, as
opposed to hostages
75
The advantages of Contract Law over
Social and Internalized Norms
Everybody
lies…
76
The advantages of Contract Law over
Reciprocal Altruism and Selfenfocement
 One-shot deals and end-period
misbehavior
77
The advantages of Contract Law over
Union Strategies
 Democratic and open to outsiders
78
The advantages of Contract Law over
Union Strategies
The “amoral familism”
of Montegrano
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The advantages of contract law
 Sir Henry Maine: “The movement of
the progressive societies has hitherto
been a movement from Status to
Contract.”
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Commerce and the New Man
“Take the view of the Royal
Exchange in London, a place
more venerable than many courts
of justice. There the Jew, the
Mahometan, and the Christian
transact together, and the name
of infidel is given to none but
bankrupts.”
Voltaire, Letters on the English,
Letter VI
81
Le doux commerce
“Commerce cures destructive prejudices;
And it is almost a general rule that
wherever there are gentle morals
(mœures douces) there is commerce;
and wherever there is commerce
there are gentle morals.”
Montesquieu, The Spirit of the Laws
II, book XX, Pléiade 585
82
Tom Friedman’s Macdonald’s Rule:
The Lexis and the Olive Tree
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Is there a trade-off?
But if the spirit of commerce unites nations,
it does not in the same manner unite individuals.
We see that in countries where the people move
only by the spirit of commerce, they make a traffic
of all the humane, all the moral virtues;
the most trifling things, those which humanity
would demand, are there done, or there given,
only for money.
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George Mason School of Law
Contracts I
Illegality: Perfectionism
F.H. Buckley
fbuckley@gmu.edu
85