The Political Economy of Regulating Contract

Contracts can be regulated through either ex ante mandatory rules or ex post default rules. Most explanations for why particular classes of contract should be regulated in one manner or the other study microeconomic features of the transactions at issue. The focus is on the dynamics by which terms are privately set, and there is little attention to differences between prospective parties except their level of information and bargaining power, properties they bear as individuals in relation to the transaction at hand. Such explanations are inherently limited in their ability to explain systematic differences between the regulatory strategies of continental Europe and the United States.This Article takes a different approach. It explains a regime's preferred method of regulating contracts, especially in the employment and consumer contexts, by reference to macro features of its political economy. Both the normative question of whether a mandatory or default approach is superior, and the positive question of which approach is probable, turn on characteristics of the population set that will be subject to the rule, characteristics of market structure in that jurisdiction, and various political institutions. Unlike others commenting on the mandatory-default divide, this Article emphasizes the importance of political and economic features of the transactional environment, not the microeconomics of the transactions themselves. The four environmental factors I study here are heterogeneity, mobility, sectoral composition and institutional capacity. After exploring their effects on domestic regulatory strategy, I discuss the limitations they pose for transnational regulation. Although “private regulation” might appear a third regulatory mode suitable in the transnational context, I argue that private agreements that constrain other private agreements are not properly regarded as an alternative to either ex ante mandatory rules or ex post interpretive defaults imposed by the state