Andreas Engert, ‘Networks and Lemons in the Market for Contract Law’

This comment to a contribution by Giesela Rühl attempts to shed more light on two critical aspects of the market for contract law. For one thing, many practitioners and academics believe that parties often choose the applicable law without regard to its legal content. Correspondingly, it is questioned whether states really adjust their contract law to attract additional users in response to competition from other jurisdictions. In support of this view, the parties can have good reasons to focus on features other than the intrinsic quality of contract laws. The economic theory of network effects explains why it may be more important to use the same law as everybody else than to find the law that best fits the contractual relationship. There is circumstantial evidence that network effects guide choice of law at least in certain areas. Even in the presence of network effects, however, jurisdictional competition can still be valuable.

For another thing, choice of law also seems to reflect differences in legal content. In this regard, jurisdictional competition is sometimes accused of undermining the ability of the law to regulate market failure. To analyze this, the ‘selection principle’ introduced by Professor Hans-Werner Sinn is applied to contract law. It turns out that law markets are indeed more prone to failure than markets in other goods. At the same time, it would be overly pessimistic to predict that the law market always replicates a failure in the underlying product or service market.

Engert, Andreas, Networks and Lemons in the Market for Contract Law (June 25, 2012). Eidenmüller (ed.), REGULATORY COMPETITION IN CONTRACT LAW AND DISPUTE RESOLUTION, Forthcoming.

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