1 George Mason School of Law Contracts I Contract Law in the State of Nature F.H. Buckley

Next Day Vices of Capacity: A. Rational Choice B. Children 2

3 Contract Law as a solution to bargaining problems Suppose that the defector is penalized through legal sanctions so that the incentive to defect disappears.

4 Contract Law as a solution Leviathan

But what if were in a state of nature International Law Weak rule of law Unenforceable agreements Transaction costs of litigation 5

6 But what if were in a State of Nature? 1.International Law Signing of NAFTA Treaty 1992

7 But what if were in a State of Nature? 2.Weak Rule of Law Deputy Mayor of Moscow Vladimir Resin sporting a $360,000 wristwatch

2.Weak Rule of Law Measures of Government Corruption

Transparency International RankScore Denmark19.3 Sweden49.2 Canada68.9 Australia88.7 Switzerland88.7 Hong Kong138.4 Germany157.9 Japan177.8 United Kingdom207.6 United States227.1

10 But what if were in a State of Nature? 3.Unenforceability Examples?

11 But what if were in a State of Nature? Unenforceability Marriage under no-fault Illegal Contracts Vague Contracts Social Promises

12 Credible Commitments in a State of Nature: Five Strategies 1.Self-binding 2.Union 3.Reciprocal Altruism 4.Social and Internalized Norms 5.Self-enforcing agreements

13 Credible Commitments 1.Self-binding

14 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

15 Hostages: The Burghers of Calais Rodin 1885

16 Not hostages: The burgers of Calais McDonald's at Walmart, 8 South St., Calais, ME 04619

17 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.

18 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending

19 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending Rings

20 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending Rings Romantic love

21 Modern examples of hostages to solve the problem of trust in bargaining Bankruptcy and secured lending Rings Romantic love Reputations

22 2.Union strategies Allen and Lueck, The Nature of the Farm

23 2.Union strategies Marriage amongst princely families Victoria and Albert, 1840

24 2.Union strategies Vertical Integration Armen Alchian As a response to post-contractual opportunism: Klein, Crawford, Alchian, 21 J.L. & Econ. 297 (1978)

25 Post-contractual opportunism But see R.H. Coase, The Acquisition of Fisher Body by General Motors, 43 J.L.E. 15 (2000)

26 Credible Commitments 3.Reciprocal Altruism Robert Trivers, 46 Quart. Rev. Biol. 35 (1971) A genetic basis to reciprocal altruism?

27 A genetic basis to reciprocal altruism?

28 Reciprocal Altruism in Game Theory Axelrod, The Evolution of Cooperation (1984) Tit-for-tat as a dominant strategy for iterated PD games

29 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 Axelrods Iterated Prisoners Dilemma

The winner and loser… Anatol Rapoport Gordon Tullock

31 TFT in action: The Christmas truce of 1914 Youre a good sort, Fritzie, for a Hun… Ver ist der turkey? Und der Belgians?

32 TFT in action: Posner and Goldsmith on Ambassadors in International Law Carpaccio, The Legend of St. Ursula: The Arrival of the English Ambassadors

33 TFT: An Application? America is at war with France and the Taliban. American POWs in France are housed in a five star hotel where they are feted with wonderful meals and fine wines. American POWs held by the Taliban are beheaded, every one of them.

34 TFT: An Application? The Geneva Convention prescribes that POWs shall be provided with exercise facilities. Is America in breach of this if it offers French but not Taliban POWs exercise facilities?

35 Example of TFT communities Old-boy networks Bullington Club members, David Cameron 8. Boris Johnson

36 Examples of TFT communities Alexis Tocqueville Americans like to form clubs

37 Racial Communities Diamond district, West 47 th Street, NYC L. Bernstein, 21 J. Legal Stud. 115 (1992)

38 Credible Commitments 4.Social and Internalized Norms Ruth Benedict on shame cultures The Chrysanthemum and the Sword (1989)

39 4.Social Norms David, Andromache Mourning Hector

4.Social Norms 40 Handing out the white feather

Just how long did that last? 41 Lytton Strachey

42 But still… Consider the following examples of cooperative behavior: Not littering Gas Guzzlers Helping out in an emergency: the Good Samaritan

Yet we never lack for social norms 43 Lytton Strachey 43

What happens when shame is internalized? 44 There is a man inside me who is angry with me Sir Thomas Browne Georges de la Tour, Repentant Magdalene

45 Why Guilt is Good for You If Homo Economicus Had a Choice, would he want a conscience? Robert Frank, 77 AER 593 (1987)

46 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

47 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)

48 Guilt Explains Why We Have Faces Whom would you vote for? Sen Russ Feingold (Dem. WI )

49 Guilt Explains Why We Have Faces And this time?

50 Guilt Explains Why We Have Faces And this time? Sen. Ron Johnson (Rep. WI)

51 Guilt Explains Why We Have Faces Deception detection: Guilt and Facial Signals Paul Ekman, Darwin and Facial Expressions (1973); What the Face Reveals (1997) Which smile is genuine?

52 Guilt Explains Why We Have Faces Deception detection: Guilt and Facial Signals Zygomatic smiles From an evolutionary perspective, an arms race between deceptive expressions and deception detection

53 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

54 Microexpressions De la Tour, The Fortune Teller

55 Look at the Hands

56 Microexpressions

57 Look at the Hands

58 Microexpressions De la Tour, The Fortune Teller

59 Microexpressions De la Tour, The Fortune Teller

60 Microexpressions

Make the Mule 61 You are a plainclothes detective at LAX, charged with identifying drug smugglers as they exit a plane. How do you pick them out?

Spot the liar Two mothers. Which one killed her children? Mother One Mother Two 62

Some Cold War History… 63 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

Some Cold War History… 64 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-235a few days after Hiroshima

Some Cold War History… 65 The RCMP passed on the information to MI-5

Some Cold War History… 66 Which assigned it to their head of Soviet Counter-Intelligence… 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

69 CooperateDefect Cooperate3, 3-1, 4 Defect4, -10, 0 Player 2 Player 1 Payoffs in a one-period PD Game

70 CooperateDefect Cooperate30, 30-1, 4 Defect4, -10, 0 Player 2 Player 1 Payoffs in an iterated PD Game

5.Self-enforcing agreements 71 The Special Relationship (R.I.P)

0oops… I forgot a sixth enforcement strategy in the state of nature Can you think what it might be? 72

Meet Nick the Chin 73 Im tinkin youse should pay what youse owe

74 But contract law persists (happily)

75 The advantages of Contract Law over Self-binding Strategies Contract Law frees up assets, as opposed to hostages 75

76 The advantages of Contract Law over Social and Internalized Norms 76 Everybody lies…

77 The advantages of Contract Law over Reciprocal Altruism and Self- enfocement One-shot deals and end-period misbehavior 77

78 The advantages of Contract Law over Union Strategies Democratic and open to outsiders 78

79 The advantages of Contract Law over Union Strategies 79 The amoral familism of Montegrano

80 The advantages of contract law Sir Henry Maine: The movement of the progressive societies has hitherto been a movement from Status to Contract.

81 Commerce and the New Man 81 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

82 Le doux commerce 82 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

83 Tom Friedmans Macdonalds Rule: The Lexis and the Olive Tree

84 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. Is there a trade-off?

85 George Mason School of Law Contracts I Illegality: Perfectionism F.H. Buckley