The Negligence-Opportunism Tradeoff in Contract Law
In this Article,' Professor Cohen discusses the relationship between two traditions of contract analysis developed in the Law and Economics literature: one which focuses on assigning the "sunk" costs of contract breach to the "least cost avoider," and one which would assign these costs to whichever of the contracting parties most likely acted opportunistically. The Article begins with a thorough description of these two analytical strands, and uses them to critique the classic "efficient breach" scenario.
Professor Cohen posits a fault-based economic theory of contract analysis that combines the "least cost avoider" and "opportunism" analytical strands. He focuses his discussion on scenarios where these two analytical strands suggest differing outcomes to the question of which party to a contract ought to absorb the "sunk" costs associated with its breach. He argues that these scenarios present a tradeoff between deterring negligent and opportunistic behavior in the marketplace: The Negligence-Opportunism Tradeoff. This tradeoff is analogous to the classic tension between individual freedom and society's interest in market regulation. Professor Cohen resolves this tension by arguing that the law should place a presumptive priority on curbing potentially opportunistic behavior, at the expense of permitting-or at least not preventing-potentially negligent behavior. He argues that to give priority to deterring negligence over deterring opportunism-which many Law and Economics scholars implicitly advocate-perversely rewards deceitful behavior while punishing often unobservant action, and cracks the foundation of trust necessary for efficient contracting to occur.