Law v. trust

Boston University Law Review

Volumn 81, Issue 3, 2001, Pages 553-590

  Ribstein, Larry E ^a  

^a NONE

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EID: 0035646037     PISSN: 00068047     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (315)

1. This notion was popularized in FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995) [hereinafter FUKUYAMA, SOCIAL VIRTUES). See id. at 151 (describing trust as a lubricant that reduces transaction costs); see also MARGARET M. BLAIR & LYNN A. STOUT, TRUST, TRUSTWORTHINESS, AND THE BEHAVIORAL FOUNDATIONS OF CORPORATE LAW 25 (Georgetown Working Paper No. 241403, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_jd=241403〉 (explaining that "[w]here trust can be harnessed, it can substantially reduce the inefficiencies associated with both agency and team production relationships," and noting that trust "reduces the need to expend resources to constantly monitor employees and business partners"); JAMES S. COLEMAN, FOUNDATIONS OF SOCIAL THEORY 300-01 (1990) (discussing how "social capital," which Coleman defines as social relationships "which come into existence when individuals attempt to make the best use of their individual resources," facilitates social interaction and therefore productivity); id. at 97-98 (noting that the placement of trust allows "action on the part of the trustee that would not have been possible otherwise); ERIC POSNER, LAW AND SOCIAL NORMS 54 (2000) [hereinafter POSNER, SOCIAL NORMS] (noting that trust relationships allow parties to exploit surplus unobtainable through contract because of information costs); Stephen M. Bainbridge, Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 VILL. L. REV. 741, 789 (1998) [hereinafter Bainbridge, Corporate Decisionmaking] (discussing trust as "a lubricant to reduce social friction" without investing resources in contracting and enforcement).
2. This notion was popularized in FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995) [hereinafter FUKUYAMA, SOCIAL VIRTUES). See id. at 151 (describing trust as a lubricant that reduces transaction costs); see also MARGARET M. BLAIR & LYNN A. STOUT, TRUST, TRUSTWORTHINESS, AND THE BEHAVIORAL FOUNDATIONS OF CORPORATE LAW 25 (Georgetown Working Paper No. 241403, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_jd=241403〉 (explaining that "[w]here trust can be harnessed, it can substantially reduce the inefficiencies associated with both agency and team production relationships," and noting that trust "reduces the need to expend resources to constantly monitor employees and business partners"); JAMES S. COLEMAN, FOUNDATIONS OF SOCIAL THEORY 300-01 (1990) (discussing how "social capital," which Coleman defines as social relationships "which come into existence when individuals attempt to make the best use of their individual resources," facilitates social interaction and therefore productivity); id. at 97-98 (noting that the placement of trust allows "action on the part of the trustee that would not have been possible otherwise); ERIC POSNER, LAW AND SOCIAL NORMS 54 (2000) [hereinafter POSNER, SOCIAL NORMS] (noting that trust relationships allow parties to exploit surplus unobtainable through contract because of information costs); Stephen M. Bainbridge, Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 VILL. L. REV. 741, 789 (1998) [hereinafter Bainbridge, Corporate Decisionmaking] (discussing trust as "a lubricant to reduce social friction" without investing resources in contracting and enforcement).
3. This notion was popularized in FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995) [hereinafter FUKUYAMA, SOCIAL VIRTUES). See id. at 151 (describing trust as a lubricant that reduces transaction costs); see also MARGARET M. BLAIR & LYNN A. STOUT, TRUST, TRUSTWORTHINESS, AND THE BEHAVIORAL FOUNDATIONS OF CORPORATE LAW 25 (Georgetown Working Paper No. 241403, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_jd=241403〉 (explaining that "[w]here trust can be harnessed, it can substantially reduce the inefficiencies associated with both agency and team production relationships," and noting that trust "reduces the need to expend resources to constantly monitor employees and business partners"); JAMES S. COLEMAN, FOUNDATIONS OF SOCIAL THEORY 300-01 (1990) (discussing how "social capital," which Coleman defines as social relationships "which come into existence when individuals attempt to make the best use of their individual resources," facilitates social interaction and therefore productivity); id. at 97-98 (noting that the placement of trust allows "action on the part of the trustee that would not have been possible otherwise); ERIC POSNER, LAW AND SOCIAL NORMS 54 (2000) [hereinafter POSNER, SOCIAL NORMS] (noting that trust relationships allow parties to exploit surplus unobtainable through contract because of information costs); Stephen M. Bainbridge, Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 VILL. L. REV. 741, 789 (1998) [hereinafter Bainbridge, Corporate Decisionmaking] (discussing trust as "a lubricant to reduce social friction" without investing resources in contracting and enforcement).
4. This notion was popularized in FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995) [hereinafter FUKUYAMA, SOCIAL VIRTUES). See id. at 151 (describing trust as a lubricant that reduces transaction costs); see also MARGARET M. BLAIR & LYNN A. STOUT, TRUST, TRUSTWORTHINESS, AND THE BEHAVIORAL FOUNDATIONS OF CORPORATE LAW 25 (Georgetown Working Paper No. 241403, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_jd=241403〉 (explaining that "[w]here trust can be harnessed, it can substantially reduce the inefficiencies associated with both agency and team production relationships," and noting that trust "reduces the need to expend resources to constantly monitor employees and business partners"); JAMES S. COLEMAN, FOUNDATIONS OF SOCIAL THEORY 300-01 (1990) (discussing how "social capital," which Coleman defines as social relationships "which come into existence when individuals attempt to make the best use of their individual resources," facilitates social interaction and therefore productivity); id. at 97-98 (noting that the placement of trust allows "action on the part of the trustee that would not have been possible otherwise); ERIC POSNER, LAW AND SOCIAL NORMS 54 (2000) [hereinafter POSNER, SOCIAL NORMS] (noting that trust relationships allow parties to exploit surplus unobtainable through contract because of information costs); Stephen M. Bainbridge, Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 VILL. L. REV. 741, 789 (1998) [hereinafter Bainbridge, Corporate Decisionmaking] (discussing trust as "a lubricant to reduce social friction" without investing resources in contracting and enforcement).
5. This notion was popularized in FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995) [hereinafter FUKUYAMA, SOCIAL VIRTUES). See id. at 151 (describing trust as a lubricant that reduces transaction costs); see also MARGARET M. BLAIR & LYNN A. STOUT, TRUST, TRUSTWORTHINESS, AND THE BEHAVIORAL FOUNDATIONS OF CORPORATE LAW 25 (Georgetown Working Paper No. 241403, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_jd=241403〉 (explaining that "[w]here trust can be harnessed, it can substantially reduce the inefficiencies associated with both agency and team production relationships," and noting that trust "reduces the need to expend resources to constantly monitor employees and business partners"); JAMES S. COLEMAN, FOUNDATIONS OF SOCIAL THEORY 300-01 (1990) (discussing how "social capital," which Coleman defines as social relationships "which come into existence when individuals attempt to make the best use of their individual resources," facilitates social interaction and therefore productivity); id. at 97-98 (noting that the placement of trust allows "action on the part of the trustee that would not have been possible otherwise); ERIC POSNER, LAW AND SOCIAL NORMS 54 (2000) [hereinafter POSNER, SOCIAL NORMS] (noting that trust relationships allow parties to exploit surplus unobtainable through contract because of information costs); Stephen M. Bainbridge, Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, 43 VILL. L. REV. 741, 789 (1998) [hereinafter Bainbridge, Corporate Decisionmaking] (discussing trust as "a lubricant to reduce social friction" without investing resources in contracting and enforcement).
6. See Stephen Knack & Philip Keefer, Does Social Capital Have An Economic Payoff? A Cross-Country Investigation, 112 Q.J. ECON. 1251, 1252 (1997) [hereinafter Knack & Keefer, Social Capital] (finding, in a cross-country comparison, that trust and civic norms are associated with higher economic performance);
7. Rafael La Porta et al., Trust in Large Organizations, 87 AM. ECON. REV. 333, 337 (1997) [hereinafter La Porta, Large Organizations] (concluding, based on testing the trust theory on a cross section of countries, that in societies where there is more trust, government is more efficient, big firms have larger shares of the economy, and economic performance is enhanced);
8. PAUL J. ZAK & STEPHEN KNACK, TRUST AND GROWTH 32 (Social Science Research Network Electronic Library Working Paper Series, 1998) 〈http;//papers.ssrn.com/paper.taf?abstract_id=136961〉 (concluding that "[t]rust, and the social and institutional factors that affect it, significantly influence growth rates"). Zak & Knack define "trust" broadly to include the "aggregate time that agents do not spend in verifying other's actions. Id. at 11. They examine the effects of legal and other institutions that reduce individual agents' verification costs irrespective of whether these institutions entail even higher costs. See id. at 11-12. Although these institutions may be positively correlated with growth, it is not clear whether the success of the institutions is correlated with underlying factors related to trust in the narrower sense used in the present paper.
9. This article focuses on the effects of mandatory rules rather than on the enforcement of private contracts. As discussed below in Part III, although contracts themselves do not create "trust" in the sense that the term is used here, legal enforcement of contract is more conducive to the development of trust than are mandatory rules that supersede contract. Moreover, as discussed in Part V.A., rules that supersede contract can create opportunities for distrust. This is consistent with theories and data showing that government institutions that support contract and property rights can promote trust. See, e.g., Knack & Keefer, Social Capital, supra note 2, at 1276 (showing a correlation between trust and the security of property rights as measured by the "risk of repudiation of government contracts" and the "risk of expropriation of assets").
10. This is actually an unduly restrictive view of economics. See infra text accompanying note 33 (noting that "the rational choice model of economics does not exclude altruism").
11. See BLAIR &STOUT, supra note 1, at 19 (suggesting that "the idea of internalized trust [as opposed to 'calculative behavior motivated by external rewards or sanctions'] . . . poses a fundamental challenge to the neoclassical model of human behavior driven by rational self-interest"); id. at 27-28 (indicating that, in order to embrace the concept of trust as a motivating factor in corporations, one would have to abandon "the idea of rational selfishness");
12. TAMAR FRANKEL, TRUSTING AND NON-TRUSTING: COMPARING BENEFITS, COST AND RISK 25 (Boston University School of Law Working Paper No. 99-12, 1999) 〈http://www.bu.edu/law/faculty/papers〉 (noting that whereas contract law is "based on independence and individualism [and emphasizes] self-protection from others" indicating lack of trust, fiduciary law encourages "dependence and reliance on . . . others," and thereby encourages trust relationships);
13. Lawrence E. Mitchell, Trust and Team Production in Post-Capitalist Society, 24 J. CORP. L. 869, 888-91 (1999) (arguing that trust does not reduce to calculativeness).
14. Blair and Stout claim that trust supports anti-contractarian theory because contractual constraints may reduce trust. See BLAIR & STOUT, supra note 1, at 55. My point, however, is not that contractual constraints necessarily are preferable to no constraints, but that the parties ought to be able to choose what, if any, constraints should apply to their relationship. Moreover, as indicated supra note 3 and discussed infra Part V.A., even if contractual constraints are less conducive to trust than no such constraints, they may invite more trust than mandatory regulation.
15. See NIKLAS LUHMANN, TRUST AND POWER, 79, 93-94 (1979).
16. See id. at 24.
17. For analyses using similar formulae, see COLEMAN, supra note 1, at 99. See generally Avner Ben-Ner & Louis Putterman, Trusting and Trustworthiness, 81 B.U.L. REV. (2001).
18. For analyses using similar formulae, see COLEMAN, supra note 1, at 99. See generally Avner Ben-Ner & Louis Putterman, Trusting and Trustworthiness, 81 B.U.L. REV. (2001).
19. See LUHMANN, supra note 7, at 79.
20. See generally Ben-Ner & Putterman, supra note 9 (discussing, generally, the interaction between trustworthiness and trust).
21. See generally Lawrence E. Mitchell, The Importance of Being Trusted, 81 B.U.L. REV. (2001) (noting that calculativeness is not a useful perspective from which to look at trust and trust relationships); cf. Russell Hardin, Trustworthiness, 107 ETHICS 26, 41-42 (1996) (concluding that the devices for making commitments to other people, supporting institutions, or maintaining relationships with particular people "involve contriving to make it in the individual's best interest to be trustworthy"). 13 In contrast, Blair and Stout define trust to include the expectation that the trusted actor will behave "trustworthily" because of legal and market sanctions, fear of reputational loss and retaliation, or because of an "internalized" desire to behave trustworthily. See BLAIR & STOUT, supra note 1, at 11-18. Thus, the definition seems to include only trust based on some sort of calculation by the trustor.
22. See generally Lawrence E. Mitchell, The Importance of Being Trusted, 81 B.U.L. REV. (2001) (noting that calculativeness is not a useful perspective from which to look at trust and trust relationships); cf. Russell Hardin, Trustworthiness, 107 ETHICS 26, 41-42 (1996) (concluding that the devices for making commitments to other people, supporting institutions, or maintaining relationships with particular people "involve contriving to make it in the individual's best interest to be trustworthy"). 13 In contrast, Blair and Stout define trust to include the expectation that the trusted actor will behave "trustworthily" because of legal and market sanctions, fear of reputational loss and retaliation, or because of an "internalized" desire to behave trustworthily. See BLAIR & STOUT, supra note 1, at 11-18. Thus, the definition seems to include only trust based on some sort of calculation by the trustor.
23. See generally Lawrence E. Mitchell, The Importance of Being Trusted, 81 B.U.L. REV. (2001) (noting that calculativeness is not a useful perspective from which to look at trust and trust relationships); cf. Russell Hardin, Trustworthiness, 107 ETHICS 26, 41-42 (1996) (concluding that the devices for making commitments to other people, supporting institutions, or maintaining relationships with particular people "involve contriving to make it in the individual's best interest to be trustworthy"). 13 In contrast, Blair and Stout define trust to include the expectation that the trusted actor will behave "trustworthily" because of legal and market sanctions, fear of reputational loss and retaliation, or because of an "internalized" desire to behave trustworthily. See BLAIR & STOUT, supra note 1, at 11-18. Thus, the definition seems to include only trust based on some sort of calculation by the trustor.
24. See Jay B. Barney & Mark H. Hansen, Trustworthiness As a Source of Competitive Advantage, 15 STRAT. MGT. J. 175, 175 (1994).
25. Id. at 179.
26. See id. ("Hard-core [i.e. strong form] trustworthy exchange partners are trustworthy, independent of whether or not exchange vulnerabilities exist and independent of whether or not governance mechanisms exist."); see also LUHMANN, supra note 7, at 24-26; POSNER, SOCIAL NORMS, supra note 1, at 34 (defining trust narrowly, "excluding the possibility that one person trusts another to keep his promise because of the threat of legal enforcement").
27. See id. ("Hard-core [i.e. strong form] trustworthy exchange partners are trustworthy, independent of whether or not exchange vulnerabilities exist and independent of whether or not governance mechanisms exist."); see also LUHMANN, supra note 7, at 24-26; POSNER, SOCIAL NORMS, supra note 1, at 34 (defining trust narrowly, "excluding the possibility that one person trusts another to keep his promise because of the threat of legal enforcement").
28. See Barney & Hansen, supra note 14, at 177-78. This is generally what Oliver Williamson refers to as calculative behavior, which he distinguishes from trust. See Oliver E. Williamson, Calculativeness, Trust, and Economic Organization, 36 J.L. & ECON. 453, 463 (1993) [hereinafter Williamson, Calculativeness] ("[I]t . . . can be misleading to use the term 'trust' to describe commercial exchange for which cost-effective safeguards have been devised in support of more efficient exchange [i.e. calculative behavior]. Calculative trust is a contradiction in terms."). This article is generally consistent with Williamson's distinction, except that it admits a broader potential for trust beyond personal relationships. See infra text accompanying note 53.
29. See Barney & Hansen, supra note 14, at 177-78. This is generally what Oliver Williamson refers to as calculative behavior, which he distinguishes from trust. See Oliver E. Williamson, Calculativeness, Trust, and Economic Organization, 36 J.L. & ECON. 453, 463 (1993) [hereinafter Williamson, Calculativeness] ("[I]t . . . can be misleading to use the term 'trust' to describe commercial exchange for which cost-effective safeguards have been devised in support of more efficient exchange [i.e. calculative behavior]. Calculative trust is a contradiction in terms."). This article is generally consistent with Williamson's distinction, except that it admits a broader potential for trust beyond personal relationships. See infra text accompanying note 53.
30. See Barney & Hansen, supra note 14, at 177 (discussing how this sort of trust can be called "weak form" trust "because its existence does not depend on the erection of contractual or other forms of exchange governance").
31. See LUHMANN, supra note 7, at 35, 50-51.
32. See supra note 1 and accompanying text.
33. I assume for the sake of argument that more trust is a worthwhile objective of social policy. Trust may, however, be inefficient in some contexts. See generally Russell Hardin, Distrust, 81 B.U.L. REV. (2001) [hereinafter Hardin, Distrust] (concluding that under certain circumstances trust may be more harmful to the trustor and others than distrust).
34. See generally Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960) (showing that legal rules assigning property rights are irrelevant in the absence of transaction costs).
35. See Diego Gambetta, Can We Trust?, in TRUST: MAKING AND BREAKING COOPERATIVE RELATIONS 224-25 (Diego Gambetta ed., 1988).
36. Id. at 228.
37. See id.
38. See id. at 233 (noting that it is "virtually impossible" to find evidence of trustworthy behavior).
39. See id. at 234 ("Once distrust has set in it soon becomes impossible to know if it was ever in fact justified, for it has the capacity to be self-fulfilling, to generate a reality consistent with itself.").
40. Id.; see also Hardin, Distrust, supra note 21, (noting that trust may be more productive in the long run than distrust, although distrust is easier to establish in the short run).
41. Social scientists have developed scales for differentiating "high-trust" and "low-trust" individuals. See Julian B. Rotter, A New Scale for the Measurement of Interpersonal Trust, 35 J. PERSONALITY 651 (1967); Toshio Yamagishi, The Provision of a Sanctioning System as A Public Good, 51 J. PERSONALITY & SOC. PSYCH. 110 (1986).
42. Social scientists have developed scales for differentiating "high-trust" and "low-trust" individuals. See Julian B. Rotter, A New Scale for the Measurement of Interpersonal Trust, 35 J. PERSONALITY 651 (1967); Toshio Yamagishi, The Provision of a Sanctioning System as A Public Good, 51 J. PERSONALITY & SOC. PSYCH. 110 (1986).
43. See Partha Dasgupta, Trust as a Commodity, in TRUST: MAKING AND BREAKING COOPERATIVE RELATIONS, supra note 23, at 50-54; Russell Hardin, The Street Level Epistemology of Trust, 21 POL. & SOC. 505, 516-17 (1993) [hereinafter Hardin, Epistemology] (discussing how people who grow up very "optimistic about trusting others" are prone to "mistakenly overrate the trustworthiness" of others and experience a decrease in trust level, while those with a history of abuse and development of low trust will continue to distrust people in life "until they have enough experience to update their estimates of the general trustworthiness").
44. See Partha Dasgupta, Trust as a Commodity, in TRUST: MAKING AND BREAKING COOPERATIVE RELATIONS, supra note 23, at 50-54; Russell Hardin, The Street Level Epistemology of Trust, 21 POL. & SOC. 505, 516-17 (1993) [hereinafter Hardin, Epistemology] (discussing how people who grow up very "optimistic about trusting others" are prone to "mistakenly overrate the trustworthiness" of others and experience a decrease in trust level, while those with a history of abuse and development of low trust will continue to distrust people in life "until they have enough experience to update their estimates of the general trustworthiness").
45. See Jane Mansbridge, Altruistic Trust, in DEMOCRACY AND TRUST 290, 290 (Mark E. Warren ed., 1999) (noting that trust facilitates commerce, politics, and social interaction, and arguing that "systems of trust work better when members in the system adopt the moral stance of 'altruistic trust,' [whereby] one trusts the other more than is warranted by the available evidence, as a gift, for the good of both the other and the community").
46. LAWRENCE E. MITCHELL, STACKED DECK: A STORY OF SELFISHNESS IN AMERICA 205 (1998).
47. GARY BECKER, ACCOUNTING FOR TASTES 139 (1996). For similar views, see KENNETH ARROW, THE LIMITS OF ORGANIZATION 17 (1974) ("[Rationality, after all, has to do with means and ends and their relation. It does not specify what those ends are."); Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 856, 872 (1997) [hereinafter Bainbridge, Contractarian Critique] ("Empirical research on human decisionmaking tends to show behavior that is inconsistent with purely selfish behavior, but is nevertheless consistent with rational choice theory.").
48. GARY BECKER, ACCOUNTING FOR TASTES 139 (1996). For similar views, see KENNETH ARROW, THE LIMITS OF ORGANIZATION 17 (1974) ("[Rationality, after all, has to do with means and ends and their relation. It does not specify what those ends are."); Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 856, 872 (1997) [hereinafter Bainbridge, Contractarian Critique] ("Empirical research on human decisionmaking tends to show behavior that is inconsistent with purely selfish behavior, but is nevertheless consistent with rational choice theory.").
49. GARY BECKER, ACCOUNTING FOR TASTES 139 (1996). For similar views, see KENNETH ARROW, THE LIMITS OF ORGANIZATION 17 (1974) ("[Rationality, after all, has to do with means and ends and their relation. It does not specify what those ends are."); Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 856, 872 (1997) [hereinafter Bainbridge, Contractarian Critique] ("Empirical research on human decisionmaking tends to show behavior that is inconsistent with purely selfish behavior, but is nevertheless consistent with rational choice theory.").
50. See generally BECKER, supra note 33 (discussing the role of tastes in economic analysis). It has been suggested that altruism may be selfish, or "impure," in the more restrictive sense that the actor gets a "warm glow" from behaving altruistically. See, e.g., James Andreoni, Impure Altruism And Donations To Public Goods: A Theory Of Warm-Glow Giving, 100 ECON. J. 464, 464-65 (1990). But in practice it will be difficult or impossible to distinguish such behavior from "pure" altruism, particularly if altruism is integrated in the utility function.
51. See generally BECKER, supra note 33 (discussing the role of tastes in economic analysis). It has been suggested that altruism may be selfish, or "impure," in the more restrictive sense that the actor gets a "warm glow" from behaving altruistically. See, e.g., James Andreoni, Impure Altruism And Donations To Public Goods: A Theory Of Warm-Glow Giving, 100 ECON. J. 464, 464-65 (1990). But in practice it will be difficult or impossible to distinguish such behavior from "pure" altruism, particularly if altruism is integrated in the utility function.
52. See ROBERT H. FRANK, PASSIONS WITHIN REASON: THE STRATEGIC ROLE OF THE EMOTIONS 16-19 (1988).
53. See Yongmin Chen, Promises, Trust, and Contracts, 16 J.L. ECON. & ORG. 209, 215 (2000).
54. Barney & Hansen, supra note 14, at 179 n.3. Although people may say that they make decisions, including decisions to be trustworthy, at all costs, this can be regarded as a form of signaling or symbolic speech rather than an indication of true preferences. See Eric A. Posner, The Strategic Basis of Principled Behavior: A Critique of the Incommensurability Thesis, 146 U. PA. L. REV. 1185, 1195 (1998) [hereinafter Posner, Principled Behavior] (using the example of gift-giving to illustrate how people send signals to each other).
55. Barney & Hansen, supra note 14, at 179 n.3. Although people may say that they make decisions, including decisions to be trustworthy, at all costs, this can be regarded as a form of signaling or symbolic speech rather than an indication of true preferences. See Eric A. Posner, The Strategic Basis of Principled Behavior: A Critique of the Incommensurability Thesis, 146 U. PA. L. REV. 1185, 1195 (1998) [hereinafter Posner, Principled Behavior] (using the example of gift-giving to illustrate how people send signals to each other).
56. See Morton Deutsch, Trust and Suspicion, 2 J. CONFLICT RESOL. 265 (1958).
57. See id. at 272.
58. See id.
59. See id. at 275.
60. See Tom R. Tyler & Peter Degoey, Trust in Organizational Authorities: The Influence of Motive Attributions on Willingness to Accept Decisions, in TRUST IN ORGANIZATIONS: FRONTIERS OF THEORY AND RESEARCH 331 (Roderick M. Kramer & Tom R. Tyler eds., 1995).
61. See id. at 332, 338, 344 (referring to Dasgupta's theory).
62. See id. at 345.
63. See id. at 346-47.
64. See Bruce Chapman, Trust, Economic Rationality And The Fiduciary Obligation, 43 U. TORONTO L.J. 547, 582 (1993) (arguing that managers need to be the sort of people who simply are trustworthy and whom employees will trust).
65. See id. at 553.
66. See id. at 583.
67. See id. at 587.
68. See id. at 584-85. In other words, as in Robert Frank's theory discussed supra note 35, managers can use emotions as a commitment device.
69. It is not clear why workers would believe managers' assurances rather than assume that they are being played for suckers. See Cynthia Hardy et al., Distinguishing Trust and Power in Interorganizational Relations: Forms and Facades of Trust, in TRUST WlTHIN AND BETWEEN ORGANIZATIONS: CONCEPTUAL ISSUES AND EMPIRICAL APPLICATIONS 64, 76-78 (Christel Lane & Reinhard Bachmann eds., 1998) (showing how management may signal trustworthiness in order to secure union cooperation in a plant closure that is actually an exercise of employer power rather than a genuine promise of reciprocation). Even if workers are generally disposed to trust, the business firm setting is likely to mute this disposition. Experiments show that the subjects' altruism, or "other regarding preferences" (ORP), were less in the agency setting than other studies have seen outside the agency setting. See JENNIFER ARLEN ET AL., ENDOWMENT EFFECTS, OTHER-REGARDING PREFERENCES, AND CORPORATE LAW (U.S.C. Olin Working Paper No. 00-2, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=2244357〉.
70. It is not clear why workers would believe managers' assurances rather than assume that they are being played for suckers. See Cynthia Hardy et al., Distinguishing Trust and Power in Interorganizational Relations: Forms and Facades of Trust, in TRUST WlTHIN AND BETWEEN ORGANIZATIONS: CONCEPTUAL ISSUES AND EMPIRICAL APPLICATIONS 64, 76-78 (Christel Lane & Reinhard Bachmann eds., 1998) (showing how management may signal trustworthiness in order to secure union cooperation in a plant closure that is actually an exercise of employer power rather than a genuine promise of reciprocation). Even if workers are generally disposed to trust, the business firm setting is likely to mute this disposition. Experiments show that the subjects' altruism, or "other regarding preferences" (ORP), were less in the agency setting than other studies have seen outside the agency setting. See JENNIFER ARLEN ET AL., ENDOWMENT EFFECTS, OTHER-REGARDING PREFERENCES, AND CORPORATE LAW (U.S.C. Olin Working Paper No. 00-2, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=2244357〉.
71. See Hardin, Episternology, supra note 30, at 23-24 (discussing different theories of why legal sanctions may promote trust).
72. See Williamson, Calculativeness, supra note 17, at 486 n.136 (stating that "[w]hen trust is justified by expectations of positive 7eciprocal consequences, it is simply another version of economic exchange").
73. See Roy J. Lewicki & Barbara Benedict Bunker, Developing and Maintaining Trust in Wcirk Relationships, in TRUST IN ORGANIZATIONS: FRONTIERS OF THEORY AND RESEARCH, supra note 42, at 119-25.
74. See id. at 119-21.
75. See id. at 121-22.
76. See id. at 122-23.
77. See infra Part V.B.2.
78. For discussions of mechanisms for enforcing norms, see ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES, 207-29 (1991). See also Melvin A. Eisenberg, Corporate Law and Social Norms, 99 COLUM. L. REV. 1253, 1259-60 (1999); Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 MICH. L. REV. 338, 372-75(1997).
79. For discussions of mechanisms for enforcing norms, see ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES, 207-29 (1991). See also Melvin A. Eisenberg, Corporate Law and Social Norms, 99 COLUM. L. REV. 1253, 1259-60 (1999); Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 MICH. L. REV. 338, 372-75(1997).
80. For discussions of mechanisms for enforcing norms, see ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES, 207-29 (1991). See also Melvin A. Eisenberg, Corporate Law and Social Norms, 99 COLUM. L. REV. 1253, 1259-60 (1999); Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 MICH. L. REV. 338, 372-75(1997).
81. For a leading statement of this idea, see ELLICKSON, supra note 59. See also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992) (describing the diamond industry's internal rules of dispute resolution used in the place of state-created law); McAdams, supra note 59 (offering a theory of norm-origin based on the desire for esteem).
82. For a leading statement of this idea, see ELLICKSON, supra note 59. See also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992) (describing the diamond industry's internal rules of dispute resolution used in the place of state-created law); McAdams, supra note 59 (offering a theory of norm-origin based on the desire for esteem).
83. For a leading statement of this idea, see ELLICKSON, supra note 59. See also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992) (describing the diamond industry's internal rules of dispute resolution used in the place of state-created law); McAdams, supra note 59 (offering a theory of norm-origin based on the desire for esteem).
84. See ELLICKSON, supra note 59, at 49, 70, 144-47 (discussing evidence of ignorance of the law).
85. See Lawrence Lessig, The New Chicago School, 27 J. LEGAL STUD. 661, 663-72 (1998).
86. See Cass R. Sunstein, On the Expressive Function of Law, 144 U. PA. L. REV. 2021, 2024-25 (1996).
87. See Lawrence Lessig, Social Meaning and Social Norms, 144 U. PA. L. REV. 2181, 2185-89 (1996) [hereinafter Lessig, Social Norms]; Lawrence Lessig, The Regulation of Social Meaning, 62 U. CHI. L. REV. 943, 1008-14 (1995) [hereinafter Lessig, Regulation of Social Meaning] (discussing the construction and methods of altering social meaning).
88. See Lawrence Lessig, Social Meaning and Social Norms, 144 U. PA. L. REV. 2181, 2185-89 (1996) [hereinafter Lessig, Social Norms]; Lawrence Lessig, The Regulation of Social Meaning, 62 U. CHI. L. REV. 943, 1008-14 (1995) [hereinafter Lessig, Regulation of Social Meaning] (discussing the construction and methods of altering social meaning).
89. See Robert Cooter, Expressive Law & Economics, 27 J. LEGAL STUD. 585, 597-606 (1998) (developing an economic theory of expressive law).
90. See McAdams, supra note 59, at 400-08; see also Richard H. McAdams, A Focal Point Theory of Expressive Law, 86 VA. L. REV. 1649 (2000) (showing how law's expressive effects independent of legal sanctions can cause behavior to converge on a focal point).
91. See McAdams, supra note 59, at 400-08; see also Richard H. McAdams, A Focal Point Theory of Expressive Law, 86 VA. L. REV. 1649 (2000) (showing how law's expressive effects independent of legal sanctions can cause behavior to converge on a focal point).
92. See Eric A. Posner, Symbols, Signals, and Social Norms in Politics and the Law, 27 J. LEGAL STUD. 765, 778-89 (1998) [hereinafter Posner, Symbols and Social Norms].
93. For a skeptical view of law and norms, see ROBERT E. SCOTT, The Limits Of Behavioral Theories of Law and Social Norms, 86 VA. L. REV. 1603 (2000).
94. See generally Matthew D. Adler, Expressive Theories of Law: A Skeptical Overview, 148 U. PA. L. REV. 1363 (2000).
95. See Lessig, Regulation of Social Meaning, supra note 64, at 1016-19; McAdams, supra note 59, at 430-32; Richard H. Pildes, The Unintended Cultural Consequences of Public Policy, 89 MICH. L. REV. 936, at 2050 (1991); Posner, Symbols and Social Norms, supra note 67, at 798; Sunstein, supra note 63, at 2050.
96. See Lessig, Regulation of Social Meaning, supra note 64, at 1016-19; McAdams, supra note 59, at 430-32; Richard H. Pildes, The Unintended Cultural Consequences of Public Policy, 89 MICH. L. REV. 936, at 2050 (1991); Posner, Symbols and Social Norms, supra note 67, at 798; Sunstein, supra note 63, at 2050.
97. See Lessig, Regulation of Social Meaning, supra note 64, at 1016-19; McAdams, supra note 59, at 430-32; Richard H. Pildes, The Unintended Cultural Consequences of Public Policy, 89 MICH. L. REV. 936, at 2050 (1991); Posner, Symbols and Social Norms, supra note 67, at 798; Sunstein, supra note 63, at 2050.
98. See Lessig, Regulation of Social Meaning, supra note 64, at 1016-19; McAdams, supra note 59, at 430-32; Richard H. Pildes, The Unintended Cultural Consequences of Public Policy, 89 MICH. L. REV. 936, at 2050 (1991); Posner, Symbols and Social Norms, supra note 67, at 798; Sunstein, supra note 63, at 2050.
99. See Lessig, Regulation of Social Meaning, supra note 64, at 1016-19; McAdams, supra note 59, at 430-32; Richard H. Pildes, The Unintended Cultural Consequences of Public Policy, 89 MICH. L. REV. 936, at 2050 (1991); Posner, Symbols and Social Norms, supra note 67, at 798; Sunstein, supra note 63, at 2050.
100. See Eisenberg, supra note 59, at 1276-78 (discussing this concretization in the context of corporate directors' duty of loyalty);
101. Simon Deakin & Frank Wilkinson: Contract Law and the Economics of Interorganizational Trust, in TRUST WITHIN AND BETWEEN ORGANIZATIONS: CONCEPTUAL ISSUES AND EMPIRICAL APPLICATIONS, supra note 51, at 146-69 (arguing that, because regulation may influence the development of trust norms, we should not look merely at law's coercive effect to assess its overall impact).
102. See Market Street Assocs. v. Frey, 941 F.2d 588, 595 (7th Cir. 1991) (Posner, J.) (noting that "[i]t would be quixotic as well as presumptuous for judges to undertake through contract law to raise the ethical standards of the nation's business people").
103. See Bainbridge, Contractarian Critique, supra note 33, at 867-68 (criticizing as indeterminate a proposal for basing legal enforcement on social norms against cheating).
104. See Eisenberg, supra note 59, at 1270-71 (arguing that it is the law's influence in clarifying norms and not the desire to avoid liability that affects the behavior of directors and other corporate actors); Robert W. Hillman, Business Partners as Fiduciaries: Reflections on the Limits of Doctrine, 22 CARDOZO L. REV. 51 (detailing the difference between the language of Judge Cardozo's famous opinion in Meinhard v. Salmon and its application by the courts); Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work, 44 UCLA L. REV. 1009, 1014-19 (1997) (discussing the distinction between legal rules and judicial statements of norms in Delaware management buyout cases). For an article supporting the broad fiduciary obligation required by Meinhard and not simply the moralistic language, see Nicholas L. Georgakopoulos, Meinhard v. Salmon and the Economics of Honor, 1999 COLUM. BUS. L. REV. 137, 139-40, 146-53 (1997).
105. See Eisenberg, supra note 59, at 1270-71 (arguing that it is the law's influence in clarifying norms and not the desire to avoid liability that affects the behavior of directors and other corporate actors); Robert W. Hillman, Business Partners as Fiduciaries: Reflections on the Limits of Doctrine, 22 CARDOZO L. REV. 51 (detailing the difference between the language of Judge Cardozo's famous opinion in Meinhard v. Salmon and its application by the courts); Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work, 44 UCLA L. REV. 1009, 1014-19 (1997) (discussing the distinction between legal rules and judicial statements of norms in Delaware management buyout cases). For an article supporting the broad fiduciary obligation required by Meinhard and not simply the moralistic language, see Nicholas L. Georgakopoulos, Meinhard v. Salmon and the Economics of Honor, 1999 COLUM. BUS. L. REV. 137, 139-40, 146-53 (1997).
106. See Eisenberg, supra note 59, at 1270-71 (arguing that it is the law's influence in clarifying norms and not the desire to avoid liability that affects the behavior of directors and other corporate actors); Robert W. Hillman, Business Partners as Fiduciaries: Reflections on the Limits of Doctrine, 22 CARDOZO L. REV. 51 (detailing the difference between the language of Judge Cardozo's famous opinion in Meinhard v. Salmon and its application by the courts); Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work, 44 UCLA L. REV. 1009, 1014-19 (1997) (discussing the distinction between legal rules and judicial statements of norms in Delaware management buyout cases). For an article supporting the broad fiduciary obligation required by Meinhard and not simply the moralistic language, see Nicholas L. Georgakopoulos, Meinhard v. Salmon and the Economics of Honor, 1999 COLUM. BUS. L. REV. 137, 139-40, 146-53 (1997).
107. See Eisenberg, supra note 59, at 1270-71 (arguing that it is the law's influence in clarifying norms and not the desire to avoid liability that affects the behavior of directors and other corporate actors); Robert W. Hillman, Business Partners as Fiduciaries: Reflections on the Limits of Doctrine, 22 CARDOZO L. REV. 51 (detailing the difference between the language of Judge Cardozo's famous opinion in Meinhard v. Salmon and its application by the courts); Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work, 44 UCLA L. REV. 1009, 1014-19 (1997) (discussing the distinction between legal rules and judicial statements of norms in Delaware management buyout cases). For an article supporting the broad fiduciary obligation required by Meinhard and not simply the moralistic language, see Nicholas L. Georgakopoulos, Meinhard v. Salmon and the Economics of Honor, 1999 COLUM. BUS. L. REV. 137, 139-40, 146-53 (1997).
108. See BLAIR & STOUT, supra note 1, at 8-10, 59-74.
109. See id. at 66, 70-72.
110. See id. at 56-58. Blair and Stout also observe that since "contractarian theory finds its roots in economic analysis," and since neoclassical economics treats preferences as given, contractarian theory cannot cause people to adopt a different, other-regarding, preference function. Id. at 58-59. However, the law and economics literature now incorporates a variety of approaches to preferences. More important, regardless of how "economic analysis" is construed, the present article shows that it is mandatory regulation, and not private ordering, that is incompatible with theories of trust.
111. See id. at 60-62.
112. See infra Part V.A.3.
113. See BLAIR & STOUT, supra note 1, at 73-74.
114. See infra note 191 and accompanying text.
115. See infra Part V.B.2.
116. See COLEMAN, supra note 1, at 312-13. For leading works on the role of associations in creating social capital, see ROBERT D. PUTNAM, BOWLING ALONE (2000) [hereinafter PUTNAM, BOWLING ALONE] (concluding that social capital is declining in the U.S. because of a reduction in associational activity). See also ROBERT D. PUTNAM, MAKING DEMOCRACY WORK (1993) [hereinafter PUTNAM, MAKING DEMOCRACY WORK] (explaining differences in economic success and government efficacy between northern and southern Italy in terms of associational activity).
117. See COLEMAN, supra note 1, at 312-13. For leading works on the role of associations in creating social capital, see ROBERT D. PUTNAM, BOWLING ALONE (2000) [hereinafter PUTNAM, BOWLING ALONE] (concluding that social capital is declining in the U.S. because of a reduction in associational activity). See also ROBERT D. PUTNAM, MAKING DEMOCRACY WORK (1993) [hereinafter PUTNAM, MAKING DEMOCRACY WORK] (explaining differences in economic success and government efficacy between northern and southern Italy in terms of associational activity).
118. See COLEMAN, supra note 1, at 312-13. For leading works on the role of associations in creating social capital, see ROBERT D. PUTNAM, BOWLING ALONE (2000) [hereinafter PUTNAM, BOWLING ALONE] (concluding that social capital is declining in the U.S. because of a reduction in associational activity). See also ROBERT D. PUTNAM, MAKING DEMOCRACY WORK (1993) [hereinafter PUTNAM, MAKING DEMOCRACY WORK] (explaining differences in economic success and government efficacy between northern and southern Italy in terms of associational activity).
119. See COLEMAN, supra note 1, at 313.
120. See id. at 114, 310-11. For a discussion of norms, see supra Part II.C.
121. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
122. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
123. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
124. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
125. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
126. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
127. See COLEMAN, supra note 1, at 320-21 (noting the role of ideology in religious schools). The link between non-hierarchical Protestant religions and trust is explored in FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 44-47, 286-94; Janet Tai Landa, A Theory Of The Ethnically Homogeneous Middleman Group: An Alternative To Contract Law, 10 J. LEG. STUD. 349 (1981), reprinted in JANET TAI LANDA, TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-EXCHANGE 101-14 (1994) (showing how transaction costs among Chinese merchants are reduced by adherence to the Confucian code of ethics in Chinese middleman economy). See also PUTNAM, BOWLING ALONE, supra note 83, at 75-79; La Porta, Large Organizations, supra note 2 (finding empirical support for this link in a cross-country comparison). For a more general description of mechanisms for creating cooperation in society, see JON ELSTER, THE CEMENT OF SOCIETY: A STUDY OF SOCIAL ORDER (1989).
128. See PUTNAM, BOWLING ALONE, supra note 83, at 136-37.
129. See Bainbridge, Corporate Decisionmaking, supra note 1, at 797-99; cf. ELLICKSON, supra note 59, at 177-82.
130. See Bainbridge, Corporate Decisionmaking, supra note 1, at 797-99; cf. ELLICKSON, supra note 59, at 177-82.
131. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 27 (defining "spontaneous sociability" as a subset of social capital); see also FRANCIS FUKUYAMA, THE GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 51 (1999) (noting that trust grows from shared norms of honesty and reciprocity); id. at 240-41 (discussing the cultural and religious bases of trust); Francis Fukuyama, Differing Disciplinary Perspectives on the Origin of Trust, 81 B.U.L. REV. (2001) (noting that social capital is norms and values that promote cooperation and serves as the basis of trust).
132. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 27 (defining "spontaneous sociability" as a subset of social capital); see also FRANCIS FUKUYAMA, THE GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 51 (1999) (noting that trust grows from shared norms of honesty and reciprocity); id. at 240-41 (discussing the cultural and religious bases of trust); Francis Fukuyama, Differing Disciplinary Perspectives on the Origin of Trust, 81 B.U.L. REV. (2001) (noting that social capital is norms and values that promote cooperation and serves as the basis of trust).
133. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 27 (defining "spontaneous sociability" as a subset of social capital); see also FRANCIS FUKUYAMA, THE GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 51 (1999) (noting that trust grows from shared norms of honesty and reciprocity); id. at 240-41 (discussing the cultural and religious bases of trust); Francis Fukuyama, Differing Disciplinary Perspectives on the Origin of Trust, 81 B.U.L. REV. (2001) (noting that social capital is norms and values that promote cooperation and serves as the basis of trust).
134. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 27-30 (noting that societies with high sociability have trust in larger organizations). The reliance on families in a low-trust society is humorously illustrated in Ian Fleming's, From Russia with Love, in which a Turkish intelligence agent employs only his many sons.
135. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 27-30 (noting that societies with high sociability have trust in larger organizations). The reliance on families in a low-trust society is humorously illustrated in Ian Fleming's, From Russia with Love, in which a Turkish intelligence agent employs only his many sons.
136. See id. at 36, 47-48, 62-63, 226.
137. See supra text accompanying note 52.
138. See infra Part V.B.4.
139. See Oliver E. Williamson, Credible Commitments: Using Hostages to Support Exchange, 73 AM . ECON. REV. 519 (1983).
140. See infra notes 96-99 and accompanying text.
141. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976).
142. See Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615 (1981); Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 303 (1978).
143. See Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615 (1981); Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 303 (1978).
144. See Jonathan M. Karpoff & John R. Lott, Jr., The Reputational Penalty Firms Bear from Committing Criminal Fraud, 36 J.L. & ECON. 757, 758-60 (1993) (presenting evidence of the reputational costs of corporate fraud).
145. See Laura Poppo & Todd R. Zenger, Substitutes or Complements? Exploring the Relationship Between Formal Contracts and Relational Governance (April 27, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=223518〉
146. See Williamson, Calculativeness, supra note 17.
147. As to the tradeoff of price and safeguards, see id. at 467-69.
148. See id. at 463 (noting that it is redundant or misleading to use trust to describe commercial exchange with safeguards and that "calculative trust is a contradiction in terms").
149. See Dasgupta, supra note 30, at 50.
150. See id. at 53.
151. See id. at 53, 62.
152. See infra note 175 and accompanying text.
153. See infra text accompanying note 179.
154. For descriptions of the roles played by these devices, see generally FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarions, 65 WASH. L. REV. 1 (1990).
155. For descriptions of the roles played by these devices, see generally FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991); Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarions, 65 WASH. L. REV. 1 (1990).
156. David M. Rreps, Corporate Culture and Economic Theory, in PERSPECTIVES ON POSITIVE POLITICAL ECONOMY 100 (James Alt & Kenneth Shepsle eds., 1990) (discussing how a corporation chooses and enforces principles that establish reputation and ensure future beneficial transactions).
157. See id. at 110.
158. See id. at 110-11; see also Larry E. Ribstein, Ethical Rules, Agency Costs and Law Firm Structure, 84 VA. L. REV. 1707, 1714-15 (1998) (discussing the role of reputational bonding in law firms).
159. See Kreps, supra note 109, at 127.
160. See id. at 125-26. The communication of the firm's culture can be understood in terms of Eric Posner's signaling theory. See Posner, Principled Behavior, supra note 37, at 1194-97 (describing the dynamics that force firms to overstate the "purity of their motives" because any degree of self-interest is perceived as "unprincipled"). Managers may make absolute statements about the firm's culture of trustworthiness because if they confessed to any self-interest, employees, communities, and others would tend to over-discount the reliability of the firm's promises. See also Ben-Ner & Putterman, supra note 9 (discussing how firms induce trust through such devices as culture and charitable activities).
161. See id. at 125-26. The communication of the firm's culture can be understood in terms of Eric Posner's signaling theory. See Posner, Principled Behavior, supra note 37, at 1194-97 (describing the dynamics that force firms to overstate the "purity of their motives" because any degree of self-interest is perceived as "unprincipled"). Managers may make absolute statements about the firm's culture of trustworthiness because if they confessed to any self-interest, employees, communities, and others would tend to over-discount the reliability of the firm's promises. See also Ben-Ner & Putterman, supra note 9 (discussing how firms induce trust through such devices as culture and charitable activities).
162. See supra text accompanying note 18.
163. See FRANKEL, supra note 5, at 3 (maintaining that "a stable financial system requires the support of fiduciary law principles, judicial enforcement, and monitoring by independent regulatory agencies").
164. See John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L. REV. 625, 627 (1995) (concluding that, although trust law is thought of as part of property law, the management and distribution of trust assets is more aptly described under contract theory).
165. See FRANKEL, supra note 5, at 28 (asserting that the liquidity of financial markets creates special risks of mismanagement that can only be controlled with the support of the law).
166. See id. at 28.
167. See id. at 30.
168. See id. at 5-6 (asserting that fiduciary duties are based on property rights rather than contract damages); id. at 31 (stating that the weaker contract approach encourages mistrust through such rules as efficient breach, no duty to speak, and damages rather than accounting for profits).
169. See id. at 31-32.
170. See FRANKEL, supra note 5, at 32.
171. Id. at 34.
172. See id. at 29.
173. Id. at 33.
174. Lawrence Mitchell makes a rather surprising argument about an alternative investor response to distrust-that it causes individual shareholders to be reluctant to invest in individual stocks. See Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 479-80 (1993) [hereinafter Mitchell, Fairness and Trust] (suggesting that decreased trust among individual traders is not reflected in trading volumes since institutional traders that require less fiduciary protection continue to trade). In other words, distrust leads to diversification. If this is so, then distrust explains the capital asset pricing model, although it is not clear what this explanation adds. But given distrust, the increase in diversification may be an entirely salutary development reflecting the growth of diversification devices, including index mutual funds.
175. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
176. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
177. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
178. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
179. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
180. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
181. See, e.g., Bernard S. Black, The Legal and Industrial Preconditions for Strong Securities Markets, 48 UCLA L. REV. (forthcoming 2001) (concluding that the essential requirements for strong securities markets are laws and institutions that protect the ability of minority shareholders' to obtain information and develop confidence in company insiders); Bernard S. Black, The Core Institutions that Support Strong Securities Markets, 55 BUS. LAW. 1565 (2000); Bernard S. Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 ( 1996) (proposing corporate governance structures tailored to meet the needs of emerging economies); Florencio Lopez de Silanes et al., Agency Problems and Dividend Policies Around the World, 55 J. FIN. 1 (2000) (finding, in a survey of 33 countries, a correlation between minority shareholder protection and high dividend payout); Florencio Lopez de Silanes et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (finding, in a survey of 49 countries, that poor investor protection correlated with smaller, narrow capital markets); Rafael La Porta et al., Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (finding, in a survey of 27 wealthy countries, diverse corporate ownership only where institutional structures protect shareholder rights); Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (observing a correlation between increased investor protection and diversity of corporate ownership).
182. Similarly, in assessing evidence of the effectiveness of the securities laws, one would not expect these laws to have increased risk-adjusted returns. See Frank Easterbrook & Daniel Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 681-83 (1984).
183. See Tamar Frankel, Trusting and Non-Trusting on the Internet, 81 B.U.L. REV. 457 (2001) (discussing a cost-benefit approach to regulation that increases regulation when investor verification costs are high).
184. See Mitchell, Fairness and Trust, supra note 126, at 425-30 (stating that the introduction of the fairness test in fiduciary relationships provides no substantive check on fiduciary self-dealing). The focus on shareholders is somewhat ironic since in the communitarian framework shareholder primacy and wealth maximization is the great evil to be redressed. See. e.g., ALLAN A. KENNEDY THE END OF SHAREHOLDER VALUE xiii (2000) (noting that the drive for wealth maximization by major shareholders has had "crisis-like implications for the future of business").
185. See Mitchell, Fairness and Trust, supra note 126, at 425-30 (stating that the introduction of the fairness test in fiduciary relationships provides no substantive check on fiduciary self-dealing). The focus on shareholders is somewhat ironic since in the communitarian framework shareholder primacy and wealth maximization is the great evil to be redressed. See. e.g., ALLAN A. KENNEDY THE END OF SHAREHOLDER VALUE xiii (2000) (noting that the drive for wealth maximization by major shareholders has had "crisis-like implications for the future of business").
186. See Mitchell, Fairness and Trust, supra note 126, at 485 (observing that allowing the fairness standard in evaluating self-dealing, rather than a best price standard or outright prohibition, gives fiduciaries the right to benefit personally from assets of the corporation).
187. Id. at 491.
188. See Lawrence E. Mitchell, Trust. Contract. Process, in PROGRESSIVE CORPORATE LAW 185, 185-87 (Lawrence E. Mitchell ed., 1995).
189. See id. at 187.
190. See id. at 203-04 (noting that the risk of misuse of power causes fear); id. at 206 (stating that the primary casualty of breach of trust is a decreased ability to trust, which results in more monitoring and litigation and therefore manager antipathy toward shareholders); id. at 208 (noting that a narrow interpretation of duties forces shareholders to be wary and therefore to increase monitoring).
191. See id. at 195. Tamar Frankel also notes how fiduciary regulation can reduce reliance on lawyers, detailed contracting, and litigation that is prevalent under a contract regime. See FRANKEL, supra note 5, at 32. As discussed below in Part V.A., there are strong reasons to believe that, rather than supporting trust, legal remedies will spawn shareholder opportunism that will give rise to distrust.
192. See William W. Bratton, Game Theory and the Restoration of Honor to Corporate Law's Duty of Loyalty, in PROGRESSIVE CORPORATE LAW, supra note 133. at 139.
193. See id. at 141.
194. See id. at 165.
195. See id. at 141 : see also id. at 151-52 (asserting that economic actors do not rely on the goodwill of other parties, instead they actively protect themselves).
196. See id. at 167.
197. See id. at 167-68
198. See Marleen A. O'Connor, Promoting Economic Justice in Plant Closings: Exploring the Fiduciary/Contract Law Distinction to Enforce Implicit Employment Agreements, in PROGRESSIVE CORPORATE LAW, supra note 133, at 219.
199. See id. at 223.
200. See id. at 223-24. It is worth nothing in passing that there is little evidence for the proposition that reform of management/employee relationships along more cooperative lines increases efficiency. See Bainbridge, Contractarian Critique, supra note 33, at 878-81 (reviewing empirical studies that provide inconclusive results regarding the benefits of employee involvement in managerial tasks).
201. See O'Connor, supra note 143, at 235-36.
202. See sources cited supra note 35.
203. Corporate communitarian ideology is perhaps best represented by the collection of essays in PROGRESSIVE CORPORATE LAW, supra note 133.
204. See generally David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 133. For excellent critiques of communitarianism, see Bainbridge, Corporate Decisionmaking, supra note 1; Bainbridge, Contractarian Critique, supra note 33. Communitarianism looks similar to "team production" theory, which also emphasizes cooperation among corporate factions. However, team production purports to be a description of how firms actually operate and therefore does not in itself seem to call for reshaping by strong mandatory rules. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law. 24 J. CORP. L. 751, 772-73 (1999). See generally Symposium, Team Production in Business Organizations, 24 L. CORP. L. 743 (1999).
205. See generally David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 133. For excellent critiques of communitarianism, see Bainbridge, Corporate Decisionmaking, supra note 1; Bainbridge, Contractarian Critique, supra note 33. Communitarianism looks similar to "team production" theory, which also emphasizes cooperation among corporate factions. However, team production purports to be a description of how firms actually operate and therefore does not in itself seem to call for reshaping by strong mandatory rules. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law. 24 J. CORP. L. 751, 772-73 (1999). See generally Symposium, Team Production in Business Organizations, 24 L. CORP. L. 743 (1999).
206. See generally David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 133. For excellent critiques of communitarianism, see Bainbridge, Corporate Decisionmaking, supra note 1; Bainbridge, Contractarian Critique, supra note 33. Communitarianism looks similar to "team production" theory, which also emphasizes cooperation among corporate factions. However, team production purports to be a description of how firms actually operate and therefore does not in itself seem to call for reshaping by strong mandatory rules. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law. 24 J. CORP. L. 751, 772-73 (1999). See generally Symposium, Team Production in Business Organizations, 24 L. CORP. L. 743 (1999).
207. See generally David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 133. For excellent critiques of communitarianism, see Bainbridge, Corporate Decisionmaking, supra note 1; Bainbridge, Contractarian Critique, supra note 33. Communitarianism looks similar to "team production" theory, which also emphasizes cooperation among corporate factions. However, team production purports to be a description of how firms actually operate and therefore does not in itself seem to call for reshaping by strong mandatory rules. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law. 24 J. CORP. L. 751, 772-73 (1999). See generally Symposium, Team Production in Business Organizations, 24 L. CORP. L. 743 (1999).
208. See generally David Millon, Communitarianism in Corporate Law: Foundations and Law Reform Strategies, in PROGRESSIVE CORPORATE LAW, supra note 133. For excellent critiques of communitarianism, see Bainbridge, Corporate Decisionmaking, supra note 1; Bainbridge, Contractarian Critique, supra note 33. Communitarianism looks similar to "team production" theory, which also emphasizes cooperation among corporate factions. However, team production purports to be a description of how firms actually operate and therefore does not in itself seem to call for reshaping by strong mandatory rules. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law. 24 J. CORP. L. 751, 772-73 (1999). See generally Symposium, Team Production in Business Organizations, 24 L. CORP. L. 743 (1999).
209. See Bainbridge, Corporate Decisionmaking, supra note 1, at 798-800.
210. See Blair & Stout, supra note 149, at 772-73.
211. See sources cited supra note 191.
212. See infra Part V.
213. See PUTNAM. supra note 87. at 147 (noting increase in demand for legal work from "preventive lawyering" because informal understandings are no longer sufficient). Another effect of the distrust that fiduciary duties may cause is diverting the parties' efforts from production to monitoring. See Eric Talley, Taking the "I" out of "Team": Intra-Firm Monitoring and the Content of Fiduciary Duties, 24 J. CORP. L. 1001, 1003 (1999).
214. See PUTNAM. supra note 87. at 147 (noting increase in demand for legal work from "preventive lawyering" because informal understandings are no longer sufficient). Another effect of the distrust that fiduciary duties may cause is diverting the parties' efforts from production to monitoring. See Eric Talley, Taking the "I" out of "Team": Intra-Firm Monitoring and the Content of Fiduciary Duties, 24 J. CORP. L. 1001, 1003 (1999).
215. 488 A.2d 858 (Del. 1985).
216. See Roberta Romano, What Went Wrong With Directors' and Officers' Liability Insurance?, 14 DEL. J. CORP. L. 1, 23-24 (1989) (citing the unpredictability of the application of business judgment rule following Van Gorkom as factor in the directors' and officers' insurance "crisis").
217. For a discussion of statutes passed in the wake of Van Gorkom, see LARRY E. RIBSTEIN & PETER V. LETSOU, BUSINESS ASSOCIATIONS 484-86 (3d ed. 1996).
218. See, e.g., Zirn v. VLI Corp. 621 A.2d 773, 783 (Del. 1993) (holding that Delaware law does not permit opting out of liability for failure to disclose that constitutes a breach of the duty of loyalty).
219. See Mitchell, Fairness and Trust, supra note 126, at 485.
220. See supra text accompanying note 143.
221. No. 92-43075-CK, 1993 WL 132385 (Cir. Ct. Washtenaw County, Mich. Feb. 9, 1993), rev'd Ypsilanti v. General Motors Corp., 506 N.W.2d 556 (Mich. Ct. App. 1993).
222. Id. at * 13.
223. See O'Connor, supra note 143, at 228-29.
224. See Larry E. Ribstein, Limited Liability Unlimited, 24 DEL. J. CORP. L. 407, 415-18 (1999) [hereinafter Ribstein, Limited Liability Unlimited] ("Given the problems of fitting into existing cubby holes, joint venturers may want to define their own relationship in their contract and avoid existing sets of default rules.").
225. 164 N.E. 545 (N.Y. 1928).
226. See id. at 546 ("A trustee is held to something stricter than the morals of the marketplace. Not honesty alone but the punctilio of an honor the most sensitive, is then the standard of behavior.").
227. See id. at 552 (Andrews, J., dissenting).
228. See sources cited supra note 164.
229. See id.
230. See Ribstein, Limited Liability Unlimited, supra note 164, at 417 (noting that the inability to waive or alter fiduciary duties may preclude the formation of some desirable ventures).
231. See supra text accompanying note 74.
232. For an alternative criticism of non-competition agreements, see Ronald J. Gilson, The Legal Infrastructure Of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 603 (1999) (concluding that such agreements restrict socially productive dissemination of information).
233. See generally id. at 607-09 (discussing the ramifications of California's effective prohibition of covenants not to compete).
234. See infra note 187 and accompanying text.
235. See BRUNO S. FREY, NOT JUST FOR THE MONEY 8, 7-8 (1997) (noting generally the crowding out effect of regulation).
236. See id. at 49-52, 81, 101.
237. See supra note 74 and accompanying text.
238. See supra Part V.A.4.
239. See IRIS BOHNET, ET AL., MORE ORDER WITH LESS LAW: ON CONTRACT ENFORCEMENT, TRUST, AND CROWDING (John F. Kennedy School of Gov't, Harv. U., Fac. Res. Working Papers Series No. 00-009, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=236476〉 (discussing experimental evidence showing that, if people are allowed to interact in a low-enforcement environment, they became more trustworthy).
240. See BLAIR & STOUT, supra note 1, at 80-84; cf. Sumantra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996) (showing that one effect of organizational control might be to indicate that people are not trustworthy to behave without controls); Kathryn E. Spier, Incomplete Contracts and Signaling, 23 RAND. J. ECON. 432, 432-33 (1992) (discussing how parties can signal their type by refraining from requesting certain types of contract terms, such as labor-management profit sharing, or an injury clause in an athlete's contract). Along the same lines, legal coercion reduces opportunities for sending emotional signals of trustworthiness under Robert Frank's theory of the emotions as a commitment device. See FRANK, supra note 35, at 96-133.
241. See BLAIR & STOUT, supra note 1, at 80-84; cf. Sumantra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996) (showing that one effect of organizational control might be to indicate that people are not trustworthy to behave without controls); Kathryn E. Spier, Incomplete Contracts and Signaling, 23 RAND. J. ECON. 432, 432-33 (1992) (discussing how parties can signal their type by refraining from requesting certain types of contract terms, such as labor-management profit sharing, or an injury clause in an athlete's contract). Along the same lines, legal coercion reduces opportunities for sending emotional signals of trustworthiness under Robert Frank's theory of the emotions as a commitment device. See FRANK, supra note 35, at 96-133.
242. See BLAIR & STOUT, supra note 1, at 80-84; cf. Sumantra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996) (showing that one effect of organizational control might be to indicate that people are not trustworthy to behave without controls); Kathryn E. Spier, Incomplete Contracts and Signaling, 23 RAND. J. ECON. 432, 432-33 (1992) (discussing how parties can signal their type by refraining from requesting certain types of contract terms, such as labor-management profit sharing, or an injury clause in an athlete's contract). Along the same lines, legal coercion reduces opportunities for sending emotional signals of trustworthiness under Robert Frank's theory of the emotions as a commitment device. See FRANK, supra note 35, at 96-133.
243. See BLAIR & STOUT, supra note 1, at 80-84; cf. Sumantra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996) (showing that one effect of organizational control might be to indicate that people are not trustworthy to behave without controls); Kathryn E. Spier, Incomplete Contracts and Signaling, 23 RAND. J. ECON. 432, 432-33 (1992) (discussing how parties can signal their type by refraining from requesting certain types of contract terms, such as labor-management profit sharing, or an injury clause in an athlete's contract). Along the same lines, legal coercion reduces opportunities for sending emotional signals of trustworthiness under Robert Frank's theory of the emotions as a commitment device. See FRANK, supra note 35, at 96-133.
244. The law's effect may be complicated in this regard by the possibility that increased vulnerability increases the value of the signal when it is given.
245. See sources cited supra note 54.
246. See Lewicki & Bunker, supra note 54, at 128-29.
247. See id. at 128-36 (explaining the steps of the trust repair process).
248. See supra Part II.C.
249. See supra text accompanying note 74.
250. See Lessig, Social Norms, supra note 64, at 2186-87 (discussing how law can affect the social meaning of behavior).
251. See id. at 2187.
252. See Bainbridge, Corporate Decisionmaking, supra note 1, at 803.
253. This is analogous to the problem of "mismatch" risk discussed in PAUL G. MAHONEY & CHRIS SANCHIRICO, COMPETING NORMS AND SOCIAL EVOLUTION: Is THE FITTEST NORM EFFICIENT? (U. Va. Law School Legal Studies Working Paper No. 00-15, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=229694〉.
254. See, e.g., BLAIR & STOUT, supra note 1, at 73-4 (noting that increased duties may suggest that breach is common); Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 AM. ECON. REV. 980, 993 (2000) (presenting "evidence that spontaneous and uncoordinated punishment activities give rise to punishment of free-riders" but asserting that "institutional and social structures . . . may cause vastly different behaviors"); Ernst Fehr & Simon Gächter, Reciprocity and Economics: The Economic Implications of Homo Reciprocans, 42 EUR. ECON. REV. 845, 855 (1998) (observing that "in the presence of pessimistic expectations about the behavior of others, negative reciprocity [treating others as one expects to or fears being treated] is even likely to make it more difficult to sustain a norm"); Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 356 (1997) (asserting that criminal behavior signals to otherwise law-abiding citizens that the risks of such behavior are low and rewards high, and that this constitutes a strong social influence on decisionmaking); Dan M. Kahan, Trust, Collective Action, and Law, 81 B.U.L. REV. 333 (2001) (suggesting that legal incentives may reduce trust and reciprocity under some circumstances).
255. See, e.g., BLAIR & STOUT, supra note 1, at 73-4 (noting that increased duties may suggest that breach is common); Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 AM. ECON. REV. 980, 993 (2000) (presenting "evidence that spontaneous and uncoordinated punishment activities give rise to punishment of free-riders" but asserting that "institutional and social structures . . . may cause vastly different behaviors"); Ernst Fehr & Simon Gächter, Reciprocity and Economics: The Economic Implications of Homo Reciprocans, 42 EUR. ECON. REV. 845, 855 (1998) (observing that "in the presence of pessimistic expectations about the behavior of others, negative reciprocity [treating others as one expects to or fears being treated] is even likely to make it more difficult to sustain a norm"); Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 356 (1997) (asserting that criminal behavior signals to otherwise law-abiding citizens that the risks of such behavior are low and rewards high, and that this constitutes a strong social influence on decisionmaking); Dan M. Kahan, Trust, Collective Action, and Law, 81 B.U.L. REV. 333 (2001) (suggesting that legal incentives may reduce trust and reciprocity under some circumstances).
256. See, e.g., BLAIR & STOUT, supra note 1, at 73-4 (noting that increased duties may suggest that breach is common); Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 AM. ECON. REV. 980, 993 (2000) (presenting "evidence that spontaneous and uncoordinated punishment activities give rise to punishment of free-riders" but asserting that "institutional and social structures . . . may cause vastly different behaviors"); Ernst Fehr & Simon Gächter, Reciprocity and Economics: The Economic Implications of Homo Reciprocans, 42 EUR. ECON. REV. 845, 855 (1998) (observing that "in the presence of pessimistic expectations about the behavior of others, negative reciprocity [treating others as one expects to or fears being treated] is even likely to make it more difficult to sustain a norm"); Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 356 (1997) (asserting that criminal behavior signals to otherwise law-abiding citizens that the risks of such behavior are low and rewards high, and that this constitutes a strong social influence on decisionmaking); Dan M. Kahan, Trust, Collective Action, and Law, 81 B.U.L. REV. 333 (2001) (suggesting that legal incentives may reduce trust and reciprocity under some circumstances).
257. See, e.g., BLAIR & STOUT, supra note 1, at 73-4 (noting that increased duties may suggest that breach is common); Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 AM. ECON. REV. 980, 993 (2000) (presenting "evidence that spontaneous and uncoordinated punishment activities give rise to punishment of free-riders" but asserting that "institutional and social structures . . . may cause vastly different behaviors"); Ernst Fehr & Simon Gächter, Reciprocity and Economics: The Economic Implications of Homo Reciprocans, 42 EUR. ECON. REV. 845, 855 (1998) (observing that "in the presence of pessimistic expectations about the behavior of others, negative reciprocity [treating others as one expects to or fears being treated] is even likely to make it more difficult to sustain a norm"); Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 356 (1997) (asserting that criminal behavior signals to otherwise law-abiding citizens that the risks of such behavior are low and rewards high, and that this constitutes a strong social influence on decisionmaking); Dan M. Kahan, Trust, Collective Action, and Law, 81 B.U.L. REV. 333 (2001) (suggesting that legal incentives may reduce trust and reciprocity under some circumstances).
258. See, e.g., BLAIR & STOUT, supra note 1, at 73-4 (noting that increased duties may suggest that breach is common); Ernst Fehr & Simon Gächter, Cooperation and Punishment in Public Goods Experiments, 90 AM. ECON. REV. 980, 993 (2000) (presenting "evidence that spontaneous and uncoordinated punishment activities give rise to punishment of free-riders" but asserting that "institutional and social structures . . . may cause vastly different behaviors"); Ernst Fehr & Simon Gächter, Reciprocity and Economics: The Economic Implications of Homo Reciprocans, 42 EUR. ECON. REV. 845, 855 (1998) (observing that "in the presence of pessimistic expectations about the behavior of others, negative reciprocity [treating others as one expects to or fears being treated] is even likely to make it more difficult to sustain a norm"); Dan M. Kahan, Social Influence, Social Meaning, and Deterrence, 83 VA. L. REV. 349, 356 (1997) (asserting that criminal behavior signals to otherwise law-abiding citizens that the risks of such behavior are low and rewards high, and that this constitutes a strong social influence on decisionmaking); Dan M. Kahan, Trust, Collective Action, and Law, 81 B.U.L. REV. 333 (2001) (suggesting that legal incentives may reduce trust and reciprocity under some circumstances).
259. See, e.g., BLAIR & STOUT, supra note 1, at 44-45; Peter H. Huang & Ho-Mou Wu, More Order without More Law: A Theory of Social Norms and Organizational Cultures, 10 J.L. ECON. & ORG. 390, 403 (1994) (showing how behavior can be strongly influenced by the expectation of corrupt behavior by others).
260. See, e.g., BLAIR & STOUT, supra note 1, at 44-45; Peter H. Huang & Ho-Mou Wu, More Order without More Law: A Theory of Social Norms and Organizational Cultures, 10 J.L. ECON. & ORG. 390, 403 (1994) (showing how behavior can be strongly influenced by the expectation of corrupt behavior by others).
261. The general point here is that contracts are less binding, and therefore more conducive to trust, than mandatory rules. By contrast, BLAIR AND STOUT, supra note 1, argue against contract based on a comparison with the absence of all constraints.
262. See Arnoud W. A. Boot et al., Reputation and Discretion in Financial Contracting, 83 AM. ECON. REV. 1165 (1993) (discussing such contracts).
263. See id. at 1176.
264. See supra Part II.D.
265. Trust can be eroded by regulation other than that related to generating trust. Legal regulation such as anti-discrimination and anti-trust laws can undermine the exclusivity these organizations need in order to create trust. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 315 (asserting that communal institutions, like the Boy Scouts, are no longer strong moral communities because they are forced by law to be less exclusive); Bainbridge, Contractarian Critique, supra note 33, at 799 (arguing that "diversity and the loss of shared values formerly held by both managers and workers" have been instrumental in "the erosion of trust in U.S. workplaces"). For articles dealing with the collision between individual rights and the "civil society" that private groups help create, see Symposium on Legal and Constitutional Implications of the Calls to Revive Civil Society, 75 CHI.-KENT L. REV. 289 (2000) (addressing from disparate viewpoints the "legal and constitutional implications of the calls to revive or renew civil society"). Exclusivity makes it easier for groups to internalize the benefits of creating social capital. First, in small enough groups, members have incentives to forego short-run self-interest in dealing with other group members because they reasonably expect those others to reciprocate. Second, exclusivity may increase cohesiveness by ensuring that group members share the same values. Consider, for example, Lisa Bernstein's Orthodox Jewish diamond dealers. See Bernstein, supra note 60. Third, the power to exclude is a way for the organization to penalize violators of its rules. See Larry E. Ribstein, Law Partner Expulsion, 55 Bus. LAW. 845 (2000).
266. Trust can be eroded by regulation other than that related to generating trust. Legal regulation such as anti-discrimination and anti-trust laws can undermine the exclusivity these organizations need in order to create trust. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 315 (asserting that communal institutions, like the Boy Scouts, are no longer strong moral communities because they are forced by law to be less exclusive); Bainbridge, Contractarian Critique, supra note 33, at 799 (arguing that "diversity and the loss of shared values formerly held by both managers and workers" have been instrumental in "the erosion of trust in U.S. workplaces"). For articles dealing with the collision between individual rights and the "civil society" that private groups help create, see Symposium on Legal and Constitutional Implications of the Calls to Revive Civil Society, 75 CHI.-KENT L. REV. 289 (2000) (addressing from disparate viewpoints the "legal and constitutional implications of the calls to revive or renew civil society"). Exclusivity makes it easier for groups to internalize the benefits of creating social capital. First, in small enough groups, members have incentives to forego short-run self-interest in dealing with other group members because they reasonably expect those others to reciprocate. Second, exclusivity may increase cohesiveness by ensuring that group members share the same values. Consider, for example, Lisa Bernstein's Orthodox Jewish diamond dealers. See Bernstein, supra note 60. Third, the power to exclude is a way for the organization to penalize violators of its rules. See Larry E. Ribstein, Law Partner Expulsion, 55 Bus. LAW. 845 (2000).
267. Trust can be eroded by regulation other than that related to generating trust. Legal regulation such as anti-discrimination and anti-trust laws can undermine the exclusivity these organizations need in order to create trust. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 315 (asserting that communal institutions, like the Boy Scouts, are no longer strong moral communities because they are forced by law to be less exclusive); Bainbridge, Contractarian Critique, supra note 33, at 799 (arguing that "diversity and the loss of shared values formerly held by both managers and workers" have been instrumental in "the erosion of trust in U.S. workplaces"). For articles dealing with the collision between individual rights and the "civil society" that private groups help create, see Symposium on Legal and Constitutional Implications of the Calls to Revive Civil Society, 75 CHI.-KENT L. REV. 289 (2000) (addressing from disparate viewpoints the "legal and constitutional implications of the calls to revive or renew civil society"). Exclusivity makes it easier for groups to internalize the benefits of creating social capital. First, in small enough groups, members have incentives to forego short-run self-interest in dealing with other group members because they reasonably expect those others to reciprocate. Second, exclusivity may increase cohesiveness by ensuring that group members share the same values. Consider, for example, Lisa Bernstein's Orthodox Jewish diamond dealers. See Bernstein, supra note 60. Third, the power to exclude is a way for the organization to penalize violators of its rules. See Larry E. Ribstein, Law Partner Expulsion, 55 Bus. LAW. 845 (2000).
268. Trust can be eroded by regulation other than that related to generating trust. Legal regulation such as anti-discrimination and anti-trust laws can undermine the exclusivity these organizations need in order to create trust. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 315 (asserting that communal institutions, like the Boy Scouts, are no longer strong moral communities because they are forced by law to be less exclusive); Bainbridge, Contractarian Critique, supra note 33, at 799 (arguing that "diversity and the loss of shared values formerly held by both managers and workers" have been instrumental in "the erosion of trust in U.S. workplaces"). For articles dealing with the collision between individual rights and the "civil society" that private groups help create, see Symposium on Legal and Constitutional Implications of the Calls to Revive Civil Society, 75 CHI.-KENT L. REV. 289 (2000) (addressing from disparate viewpoints the "legal and constitutional implications of the calls to revive or renew civil society"). Exclusivity makes it easier for groups to internalize the benefits of creating social capital. First, in small enough groups, members have incentives to forego short-run self-interest in dealing with other group members because they reasonably expect those others to reciprocate. Second, exclusivity may increase cohesiveness by ensuring that group members share the same values. Consider, for example, Lisa Bernstein's Orthodox Jewish diamond dealers. See Bernstein, supra note 60. Third, the power to exclude is a way for the organization to penalize violators of its rules. See Larry E. Ribstein, Law Partner Expulsion, 55 Bus. LAW. 845 (2000).
269. Trust can be eroded by regulation other than that related to generating trust. Legal regulation such as anti-discrimination and anti-trust laws can undermine the exclusivity these organizations need in order to create trust. See FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 315 (asserting that communal institutions, like the Boy Scouts, are no longer strong moral communities because they are forced by law to be less exclusive); Bainbridge, Contractarian Critique, supra note 33, at 799 (arguing that "diversity and the loss of shared values formerly held by both managers and workers" have been instrumental in "the erosion of trust in U.S. workplaces"). For articles dealing with the collision between individual rights and the "civil society" that private groups help create, see Symposium on Legal and Constitutional Implications of the Calls to Revive Civil Society, 75 CHI.-KENT L. REV. 289 (2000) (addressing from disparate viewpoints the "legal and constitutional implications of the calls to revive or renew civil society"). Exclusivity makes it easier for groups to internalize the benefits of creating social capital. First, in small enough groups, members have incentives to forego short-run self-interest in dealing with other group members because they reasonably expect those others to reciprocate. Second, exclusivity may increase cohesiveness by ensuring that group members share the same values. Consider, for example, Lisa Bernstein's Orthodox Jewish diamond dealers. See Bernstein, supra note 60. Third, the power to exclude is a way for the organization to penalize violators of its rules. See Larry E. Ribstein, Law Partner Expulsion, 55 Bus. LAW. 845 (2000).
270. See, e.g., FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 269-307 (discussing individuality in American society and what he argues is the consequent "crisis of trust"). Bainbridge decried: [T]he decline in social trust began when the rich set of mediating institutions famously praised by Tocqueville was caught, like the Romans at Cannae, between the nanny state on one side and judicial hijacking of the state's monopoly on the use of coercive force to advance a hyper-legalistic cult of the autonomous individual on the other. Bainbridge, Corporate Decisionmaking, supra note 1, at 803 (footnotes omitted).
271. See, e.g., FUKUYAMA, SOCIAL VIRTUES, supra note 1, at 269-307 (discussing individuality in American society and what he argues is the consequent "crisis of trust"). Bainbridge decried: [T]he decline in social trust began when the rich set of mediating institutions famously praised by Tocqueville was caught, like the Romans at Cannae, between the nanny state on one side and judicial hijacking of the state's monopoly on the use of coercive force to advance a hyper-legalistic cult of the autonomous individual on the other. Bainbridge, Corporate Decisionmaking, supra note 1, at 803 (footnotes omitted).
272. See, e.g., Nichols v. Arthur Murray, Inc., 56 Cal. Rptr. 728, 733 (1967) (imposing agency liability on a firm that licensed its name brand despite specific provisions that suggested that no agency relationship was intended).
273. For a discussion of these tradeoffs, see Ribstein, Limited Liability Unlimited, supra note 164, at 448.
274. For general discussions of the debate over this information and approaches to regulating it, see FEDERAL TRADE COMM., SELF-REGULATION AND PRIVACY ONLINE: A REPORT TO CONGRESS 1 (1999) 〈www.ttc.gov/opa/1999/9907/reportl999.htm〉 [hereinafter FTC REPORT];
275. Bruce H. Kobayashi & Larry E. Ribstein, A Recipe for Cookies: State Regulation of Consumer Marketing Information (January 30, 2001) (prepared for delivery at the American Enterprise Institute, Federalism Project Roundtable on Internet Privacy) 〈http://www.federalismproject.org/conlaw/ecommerce/cookies.pdf〉.
276. See U.S. DEP'T OF COMMERCE, PRIVACY AND ELECTRONIC COMMERCE 6 (1998) 〈http://www.doc.gov/ecommerce/privacy.htm〉 (noting that "[t]he US relies on a mix of sector-specific legislation, regulation, private sector codes of conduct and market forces").
277. A recent advertisement for Ernst & Young touts its verification service as a way for businesses to trust each other and for startups to be trusted by consumers: Protect your customers' privacy and transactions or you may be the one who gets burned . . . [if] your internet customers feel exposed they'll quickly take their business elsewhere. The CyberProcess Certification solutions that we offer, including WebTrust, help you build and maintain their trust. So you can grow your customer base and establish a competitive advantage. Ernst & Young Advertising Supplement, WIRED, July 2000, at 127.
278. For descriptions of this non-profit organization, see FTC REPORT, supra note 201, at 9-10 and TRUSTe 〈http://www.truste.org〉. TRUSTe licensees must abide by TRUSTe's policies concerning collection and use of consumer information, including TRUSTe's monitoring and auditing of licensees and resolution, reporting and possible referral to the FTC of consumer complaints. Other private organizations sponsoring consumer privacy efforts include those established by the Better Business Bureau and the American Institute of Certified Public Accountants. See FTC REPORT, supra note 201, at 10-12. For an analysis approving use of such private lawmaking regimes in Internet and other commercial law areas, see GILLIAN K. HADFIELD, PRIVATIZING COMMERCIAL LAW: LESSONS FROM THE MIDDLE AND THE DIGITAL AGES (Stan. L. Sch., John M. Olin Program in Law and Economics Working Paper No. 195, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=220252〉.
279. For descriptions of this non-profit organization, see FTC REPORT, supra note 201, at 9-10 and TRUSTe 〈http://www.truste.org〉. TRUSTe licensees must abide by TRUSTe's policies concerning collection and use of consumer information, including TRUSTe's monitoring and auditing of licensees and resolution, reporting and possible referral to the FTC of consumer complaints. Other private organizations sponsoring consumer privacy efforts include those established by the Better Business Bureau and the American Institute of Certified Public Accountants. See FTC REPORT, supra note 201, at 10-12. For an analysis approving use of such private lawmaking regimes in Internet and other commercial law areas, see GILLIAN K. HADFIELD, PRIVATIZING COMMERCIAL LAW: LESSONS FROM THE MIDDLE AND THE DIGITAL AGES (Stan. L. Sch., John M. Olin Program in Law and Economics Working Paper No. 195, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=220252〉.
280. For descriptions of this non-profit organization, see FTC REPORT, supra note 201, at 9-10 and TRUSTe 〈http://www.truste.org〉. TRUSTe licensees must abide by TRUSTe's policies concerning collection and use of consumer information, including TRUSTe's monitoring and auditing of licensees and resolution, reporting and possible referral to the FTC of consumer complaints. Other private organizations sponsoring consumer privacy efforts include those established by the Better Business Bureau and the American Institute of Certified Public Accountants. See FTC REPORT, supra note 201, at 10-12. For an analysis approving use of such private lawmaking regimes in Internet and other commercial law areas, see GILLIAN K. HADFIELD, PRIVATIZING COMMERCIAL LAW: LESSONS FROM THE MIDDLE AND THE DIGITAL AGES (Stan. L. Sch., John M. Olin Program in Law and Economics Working Paper No. 195, 2000) 〈http://papers.ssrn.com/paper.taf?abstract_id=220252〉.
281. See Avner Ben-Ner & Putterman, supra note 9 (considering the generation of trust on the Internet); Sirkka L. Jarvenpaa & Emerson H. Tiller, Customer Trust in Virtual Environments: A Managerial Perspective, 81 B.U.L. REV. (2001) (discussing possibilities for fostering trust in virtual environments).
282. See Avner Ben-Ner & Putterman, supra note 9 (considering the generation of trust on the Internet); Sirkka L. Jarvenpaa & Emerson H. Tiller, Customer Trust in Virtual Environments: A Managerial Perspective, 81 B.U.L. REV. (2001) (discussing possibilities for fostering trust in virtual environments).
283. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE 160 (1999) [hereinafter LESSIG, LAWS OF CYBERSPACE] (endorsing P3P as giving individuals a kind of automated property right in their information); Developments in the Law: The Law of Cyberspace, 112 HARV. L. REV. 1574, 1646-48 (1999) (describing P3P as "the most comprehensive code solution to reallocate the entitlement to personal information between collectors and Internet users"). For a general discussion of automated contracting and jurisdictional issues involving privacy and other matters, see Committee on Cyberspace Law Achieving Legal and Business Order in Cyberspace: A Report on Global Jurisdiction Issues Created by the Internet, 55 BUS. LAW. 1801 (2000) (reporting the findings of the American Bar Association Global Cyberspace Jurisdiction Project).
284. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE 160 (1999) [hereinafter LESSIG, LAWS OF CYBERSPACE] (endorsing P3P as giving individuals a kind of automated property right in their information); Developments in the Law: The Law of Cyberspace, 112 HARV. L. REV. 1574, 1646-48 (1999) (describing P3P as "the most comprehensive code solution to reallocate the entitlement to personal information between collectors and Internet users"). For a general discussion of automated contracting and jurisdictional issues involving privacy and other matters, see Committee on Cyberspace Law Achieving Legal and Business Order in Cyberspace: A Report on Global Jurisdiction Issues Created by the Internet, 55 BUS. LAW. 1801 (2000) (reporting the findings of the American Bar Association Global Cyberspace Jurisdiction Project).
285. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE 160 (1999) [hereinafter LESSIG, LAWS OF CYBERSPACE] (endorsing P3P as giving individuals a kind of automated property right in their information); Developments in the Law:
286. See infra text accompanying note 210.
287. See supra text accompanying note 126.
288. See e.g., Paul M. Schwartz, Privacy and Democracy in Cyberspace, 52 VAND. L. REV. 1609, 1670-81 (1999) (arguing that "[t]he protection of online privacy requires the establishment of more detailed norms in a more rapid fashion than the common law tort is likely to provide"). See generally Symposium, Cyberspace and Privacy: A New Legal Paradigm?, 52 STAN. L. REV. 987 (2000).
289. See e.g., Paul M. Schwartz, Privacy and Democracy in Cyberspace, 52 VAND. L. REV. 1609, 1670-81 (1999) (arguing that "[t]he protection of online privacy requires the establishment of more detailed norms in a more rapid fashion than the common law tort is likely to provide"). See generally Symposium, Cyberspace and Privacy: A New Legal Paradigm?, 52 STAN. L. REV. 987 (2000).
290. See, e. g., Don Clark RealNetworks Will Issue Software Patch To Block Its Program's Spying on Users, WALL ST. J., Nov. 2, 1999, at B8 (discussing RealNetworks Inc. gathering of information about consumers' listening habits without their consent); Michael Moss, A Web CEO's Elusive Goal: Privacy, WALL ST. J., Feb. 7, 2000, at B1 (discussing how ELoan despite touting the strength of their privacy policy, tracked information about consumers without their consent); Rebecca Quick, On-Line: GeoCities Broke Privacy Pledge FTC Declares, WALL ST. J., Aug. 14, 1998, at B1 (discussing GeoCities settlement of an FTC complaint that it misrepresented whether information on application forms would be disclosed to third parties); Nick Wingfield, DoubleClick Moves to Appoint Panel for Privacy Issues, WALL ST. J., May 17, 2000, at B2 (discussing DoubleClick Inc.'s controversial plans to combine databases of people's Web-surfing habits and of users personal information); Thomas E. Weber, Network Solutions Sells Marketers Its Web Database, WALL ST. J., Feb. 16, 2001, at B1 (discussing Network Solutions' plan to sell database of customer information).
291. See, e. g., Don Clark RealNetworks Will Issue Software Patch To Block Its Program's Spying on Users, WALL ST. J., Nov. 2, 1999, at B8 (discussing RealNetworks Inc. gathering of information about consumers' listening habits without their consent); Michael Moss, A Web CEO's Elusive Goal: Privacy, WALL ST. J., Feb. 7, 2000, at B1 (discussing how ELoan despite touting the strength of their privacy policy, tracked information about consumers without their consent); Rebecca Quick, On-Line: GeoCities Broke Privacy Pledge FTC Declares, WALL ST. J., Aug. 14, 1998, at B1 (discussing GeoCities settlement of an FTC complaint that it misrepresented whether information on application forms would be disclosed to third parties); Nick Wingfield, DoubleClick Moves to Appoint Panel for Privacy Issues, WALL ST. J., May 17, 2000, at B2 (discussing DoubleClick Inc.'s controversial plans to combine databases of people's Web-surfing habits and of users personal information); Thomas E. Weber, Network Solutions Sells Marketers Its Web Database, WALL ST. J., Feb. 16, 2001, at B1 (discussing Network Solutions' plan to sell database of customer information).
292. See, e. g., Don Clark RealNetworks Will Issue Software Patch To Block Its Program's Spying on Users, WALL ST. J., Nov. 2, 1999, at B8 (discussing RealNetworks Inc. gathering of information about consumers' listening habits without their consent); Michael Moss, A Web CEO's Elusive Goal: Privacy, WALL ST. J., Feb. 7, 2000, at B1 (discussing how ELoan despite touting the strength of their privacy policy, tracked information about consumers without their consent); Rebecca Quick, On-Line: GeoCities Broke Privacy Pledge FTC Declares, WALL ST. J., Aug. 14, 1998, at B1 (discussing GeoCities settlement of an FTC complaint that it misrepresented whether information on application forms would be disclosed to third parties); Nick Wingfield, DoubleClick Moves to Appoint Panel for Privacy Issues, WALL ST. J., May 17, 2000, at B2 (discussing DoubleClick Inc.'s controversial plans to combine databases of people's Web-surfing habits and of users personal information); Thomas E. Weber, Network Solutions Sells Marketers Its Web Database, WALL ST. J., Feb. 16, 2001, at B1 (discussing Network Solutions' plan to sell database of customer information).
293. See, e. g., Don Clark RealNetworks Will Issue Software Patch To Block Its Program's Spying on Users, WALL ST. J., Nov. 2, 1999, at B8 (discussing RealNetworks Inc. gathering of information about consumers' listening habits without their consent); Michael Moss, A Web CEO's Elusive Goal: Privacy, WALL ST. J., Feb. 7, 2000, at B1 (discussing how ELoan despite touting the strength of their privacy policy, tracked information about consumers without their consent); Rebecca Quick, On-Line: GeoCities Broke Privacy Pledge FTC Declares, WALL ST. J., Aug. 14, 1998, at B1 (discussing GeoCities settlement of an FTC complaint that it misrepresented whether information on application forms would be disclosed to third parties); Nick Wingfield, DoubleClick Moves to Appoint Panel for Privacy Issues, WALL ST. J., May 17, 2000, at B2 (discussing DoubleClick Inc.'s controversial plans to combine databases of people's Web-surfing habits and of users personal information); Thomas E. Weber, Network Solutions Sells Marketers Its Web Database, WALL ST. J., Feb. 16, 2001, at B1 (discussing Network Solutions' plan to sell database of customer information).
294. See, e. g., Don Clark RealNetworks Will Issue Software Patch To Block Its Program's Spying on Users, WALL ST. J., Nov. 2, 1999, at B8 (discussing RealNetworks Inc. gathering of information about consumers' listening habits without their consent); Michael Moss, A Web CEO's Elusive Goal: Privacy, WALL ST. J., Feb. 7, 2000, at B1 (discussing how ELoan despite touting the strength of their privacy policy, tracked information about consumers without their consent); Rebecca Quick, On-Line: GeoCities Broke Privacy Pledge FTC Declares, WALL ST. J., Aug. 14, 1998, at B1 (discussing GeoCities settlement of an FTC complaint that it misrepresented whether information on application forms would be disclosed to third parties); Nick Wingfield, DoubleClick Moves to Appoint Panel for Privacy Issues, WALL ST. J., May 17, 2000, at B2 (discussing DoubleClick Inc.'s controversial plans to combine databases of people's Web-surfing habits and of users personal information); Thomas E. Weber, Network Solutions Sells Marketers Its Web Database, WALL ST. J., Feb. 16, 2001, at B1 (discussing Network Solutions' plan to sell database of customer information).
295. FTC REPORT, supra note 201, at 12.
296. The FTC in its final privacy report, recently considered a more regulatory approach than in its preliminary report. See FEDERAL TRADE COMM., FINAL REPORT OF THE FTC ADVISORY COMMITTEE ON ONLINE ACCESS AND SECURITY 26 (2000) 〈http://www.ftc.gov.acoas/papers/finalreport.htm〉.
297. See Ariana Eunjung Cha, Key Firms Back Bill On Web Privacy, WASH. POST, Oct. 4, 2000, at E1 (reporting that "[t]he consensus that some legislation is needed . . . makes it likely that Congress will take some action in the coming year"); Kobayashi & Ribstein, supra note 201, at 22-23 (summarizing proposed legislation).
298. See Ariana Eunjung Cha, Key Firms Back Bill On Web Privacy, WASH. POST, Oct. 4, 2000, at E1 (reporting that "[t]he consensus that some legislation is needed . . . makes it likely that Congress will take some action in the coming year"); Kobayashi & Ribstein, supra note 201, at 22-23 (summarizing proposed legislation).
299. For an argument suggesting that legal regulation may not be cost-justified in this area given defects with the public law system, see HADFIELD, supra note 204, at 40, 58-59.
300. In addition to issues concerning consumers' willingness to rely on merchants regarding use of marketing information, there is an even more basic issue as to whether property rights in this information should be allocated to consumers or to the firms that gathered it. In other words, consumers may not own anything to "trust" merchants with. For arguments skeptical of consumers' rights, see Mark A. Lemley, Comment, Private Property, 52 STAN. L. REV. 1545 (2000) (asserting that any contemplated creation of "an intellectual property right in individual data is a bad idea" for political and practical reasons); SOLVEIG SINGLETON, PRIVACY AS CENSORSHIP: A SKEPTICAL VIEW OF PROPOSALS TO REGULATE PRIVACY IN THE PRIVATE SECTOR 3 (Cato Inst. Policy Analysis No. 295, 1998) (arguing that creation of new privacy rights would violate rights of free speech and have negative economic effects). Others would characterize the issue regarding rights to use personal information as one of determining the appropriate default rules in particular situations. See Kobayashi & Ribstein, supra note 201, at 6-12; Richard S. Murphy, Property Rights in Personal Information: An Economic Defense of Privacy, 84 GEO. L.J. 2381 (1996).
301. In addition to issues concerning consumers' willingness to rely on merchants regarding use of marketing information, there is an even more basic issue as to whether property rights in this information should be allocated to consumers or to the firms that gathered it. In other words, consumers may not own anything to "trust" merchants with. For arguments skeptical of consumers' rights, see Mark A. Lemley, Comment, Private Property, 52 STAN. L. REV. 1545 (2000) (asserting that any contemplated creation of "an intellectual property right in individual data is a bad idea" for political and practical reasons); SOLVEIG SINGLETON, PRIVACY AS CENSORSHIP: A SKEPTICAL VIEW OF PROPOSALS TO REGULATE PRIVACY IN THE PRIVATE SECTOR 3 (Cato Inst. Policy Analysis No. 295, 1998) (arguing that creation of new privacy rights would violate rights of free speech and have negative economic effects). Others would characterize the issue regarding rights to use personal information as one of determining the appropriate default rules in particular situations. See Kobayashi & Ribstein, supra note 201, at 6-12; Richard S. Murphy, Property Rights in Personal Information: An Economic Defense of Privacy, 84 GEO. L.J. 2381 (1996).
302. In addition to issues concerning consumers' willingness to rely on merchants regarding use of marketing information, there is an even more basic issue as to whether property rights in this information should be allocated to consumers or to the firms that gathered it. In other words, consumers may not own anything to "trust" merchants with. For arguments skeptical of consumers' rights, see Mark A. Lemley, Comment, Private Property, 52 STAN. L. REV. 1545 (2000) (asserting that any contemplated creation of "an intellectual property right in individual data is a bad idea" for political and practical reasons); SOLVEIG SINGLETON, PRIVACY AS CENSORSHIP: A SKEPTICAL VIEW OF PROPOSALS TO REGULATE PRIVACY IN THE PRIVATE SECTOR 3 (Cato Inst. Policy Analysis No. 295, 1998) (arguing that creation of new privacy rights would violate rights of free speech and have negative economic effects). Others would characterize the issue regarding rights to use personal information as one of determining the appropriate default rules in particular situations. See Kobayashi & Ribstein, supra note 201, at 6-12; Richard S. Murphy, Property Rights in Personal Information: An Economic Defense of Privacy, 84 GEO. L.J. 2381 (1996).
303. In addition to issues concerning consumers' willingness to rely on merchants regarding use of marketing information, there is an even more basic issue as to whether property rights in this information should be allocated to consumers or to the firms that gathered it. In other words, consumers may not own anything to "trust" merchants with. For arguments skeptical of consumers' rights, see Mark A. Lemley, Comment, Private Property, 52 STAN. L. REV. 1545 (2000) (asserting that any contemplated creation of "an intellectual property right in individual data is a bad idea" for political and practical reasons); SOLVEIG SINGLETON, PRIVACY AS CENSORSHIP: A SKEPTICAL VIEW OF PROPOSALS TO REGULATE PRIVACY IN THE PRIVATE SECTOR 3 (Cato Inst. Policy Analysis No. 295, 1998) (arguing that creation of new privacy rights would violate rights of free speech and have negative economic effects). Others would characterize the issue regarding rights to use personal information as one of determining the appropriate default rules in particular situations. See Kobayashi & Ribstein, supra note 201, at 6-12; Richard S. Murphy, Property Rights in Personal Information: An Economic Defense of Privacy, 84 GEO. L.J. 2381 (1996).
304. See supra note 203 and accompanying text.
305. See sources cited supra note 215.
306. See supra Part IV. Merchants would also face the problem of having these characterized as unenforceable adhesion contracts. This has already emerged in the context of shrinkwrap and clickware licenses. For a collection of the literature on the subject, see Mark A. Lemley, Beyond Preemption: The Law and Policy of Intellectual Property Licensing, 87 CAL. L. REV. 111, 120 n.20 (1999).
307. See supra Part V.
308. See supra Part II.D.
309. See eBay 〈http://www.ebay.com〉.
310. For a study of the reputational capital effects of eBay auctioneers, see Cynthia G. McDonald & V Carlos Slawson, Jr., Reputation in an Internet Auction Market (Jan. 25, 2000) 〈http://paPers.ssrn.com/Paper.taf?abstract_id=20744〉 (finding that "bidders reward higher reputation sellers with higher prices").
311. See LESSIG, LAWS OF CYBERSPACE, supra note 206, at 66 (discussing AOL's role in creating online communities).
312. See Miguel Helft, Ebay: We're not Auctioneers, INDUSTRY STANDARD, May 2, 2000, at 73.
313. The latter possibility was raised in an ISP's settlement of a libel case following a favorable court ruling. See Godfrey v. Demon Internet Ltd., 4 All E.R. 342 (Q.B. 1999), settlement reached March 11, 2000; John T. Aquino, British Court Concludes ISPs Liable for Bulletin Board Postings, E-COMMERCE LAW WEEKLY, April 7, 2000.
314. The latter possibility was raised in an ISP's settlement of a libel case following a favorable court ruling. See Godfrey v. Demon Internet Ltd., 4 All E.R. 342 (Q.B. 1999), settlement reached March 11, 2000; John T. Aquino, British Court Concludes ISPs Liable for Bulletin Board Postings, E-COMMERCE LAW WEEKLY, April 7, 2000.
315. An analogous problem is presented by regulation of so-called "B2B" firms and sites established among competitors in some industries, including automobile manufacturers and defense contractors, that provide a reliable way for firms to deal with others in the vertical supply chain. The FTC and the Justice Department are investigating or are being asked to investigate these sites for potential antitrust violations. See Richard E. Donovan, Online "Business-to-Business" Enterprises Raise Antitrust Issues, 10 Washington Legal Found. Legal Opinion Letter No. 15, at 1-2 (August 11, 2000).