This paper is an extremely tentative analysis of the extent to which default rules
should be tailored. In the introduction to my first article on default rules, Rob Gertner and I
promised to provide a theory for optimal tailoring.
A close reading of that article, however, reveals that we never succeeded in providing
such a theory. Although this paper will not correct that failure, I do hope to provide some
partial equilibrium insights that might be helpful to others who attempt a fuller analysis.
The paper also tries to relate optimal tailoring to a relatively welldeveloped aspect of
tort theory. This aspect is often termed the degree of "precision" but also is seen under the
rubric of "rules vs. standards."
One of the most important treatments of this topic is Isaac Ehrlich and Richard
Posner's An Economic Analysis of Legal Rulemaking. That article provides, along with many other
contributions, a recurring example of the difference between rules and standards: "If we
want to prevent driving at excessive speeds, one approach is to post specific speed limits and
to declare it unlawful per se to exceed those limits; another is to eschew specific speed limits and
simply declare that driving at unreasonable speeds is unlawful." Colin Diver and Louis Kaplow have
also made substantial contributions to this literature. The articles in this "rules vs. standards"
discussion attempt to identify when lawmakers should promulgate rules (specific speed limits) or
standards (general requirement to drive safely).
This literature, however, has largely ignored how the choice between rules and
standards is affected by the ability of private parties to contract around the law. The existing theory
then is a theory about the optimal precision of immutable rules rather than a theory about the
optimal precision of default rules.
The rather minimal thesis of this paper is that the ability of private parties to contract
around rules or standards affects their optimal level of precision. It is not appropriate to simply
import the tort, administrative law and immutable rule theories to the contract context where parties
have the private option to exit. It may be exceedingly hard, however, to provide a general theory.
While the works of Ehrlich and Posner, Diver and Kaplow contain compelling insights, none
succeeds in providing a truly general or complete analysis--in part because the topic is so
amorphous.
The normative choice between rules and standards becomes even more difficult when
parties can contract around the law. This paper is a preliminary investigation of the default
theory of rules vs. standards.