Discussion Questions for Week 8 Contracts I

Economics Department Economics 66 Fall 2010 Discussion Questions for Week 8 Contracts I 1. What voluntary contracts should the government decline to enforce as being “unconscionable”? Consider the following contracts: • Indentured Servitude contracts in 18th Century America; • Employment contracts in the Post Civil War South (see Bailey v. Alabama); • Variable rate mortgages in the 2008 financial crisis. In each case, describe why the contract might be considered “unconscionable”. Then describe the consequences of failure to enforce such contracts? 2. Should it be legal to buy and sell body organs? What are the externalities involved in such transactions? What kinds of limitations should be placed on the transactions if they were legal? 3. The cases of Hadley v. Baxendale and Laidlaw v. Organ are frequently discussed in the context of “information forcing” default rules. What are the facts in these cases and how do they support the idea of using default rules to bring information forward into the contracting process? 4. In 1975 the Westinghouse Electric Company announced that it would not honor fixed price contracts to provide nuclear fuel to a number of power plants. The company cited the “commercial impossibility” of completing the sales because the market price of fuel had tripled after the contracts were written. How should the law view such claims of “impossibility”? (The classic treatment of this issue is a 1977 article by Paul Joskow in the Journal of Legal Studies – for those interested the article is available on the website). 5. Some authors have argued that parties to a contract should have the duty to disclose “all known safety information”. Does this claim seem consistent with our discussion of the information dampening incentives of such requirements? 6. In the case of Lefkowitz v. Great Minneapolis Surplus Store the plaintiff claimed that the store had failed to honor an advertised offer of “three fur coats worth up to $100 for $1” because the coats were of very poor quality. Ultimately the court ruled that it could not enforce such an “indefinite contract”. Explain how this case might be regarded as an “incomplete contract” and how this choice of default rules might affect future such contracts. Does this seem the efficient solution?