Commitment bonds

Georgetown Law Journal

Volumn 100, Issue 3, 2012, Pages 605-656

  Abramowicz, Michael ^a   Ayres, Ian ^b  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

^b YALE UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84860163305     PISSN: 00168092     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (79)

1. Homer, The Odyssey bk. XII, in GREAT BOOKS OF THE WESTERN WORLD 250 (Robert Maynard Hutchins ed., 1952).
2. See JON ELSTER, ULYSSES UNBOUND: STUDIES IN RATIONALITY, PRECOMMITMENT, AND CONSTRAINTS 68-69 (2000).
3. G. Terence Wilson, Behavior Therapy and the Treatment of Obesity, in THE ADDICTIVE BEHAVIORS: TREATMENT OF ALCOHOLISM, DRUG ABUSE, SMOKING, AND OBESITY 207, 218 (William R. Miller ed., 1980). This approach and some similar commitment strategies are implemented on a website.
4. See FAQ - Commitment Contracts - Charities, STICKK, http://www.stickk. com/faq.php#charities (last visited July 10, 2009) (noting that one can arrange to forfeit money either to a charity or to an "anti-charity"). That site, however, does not use or discuss the commitment bonds approach described here or provide any similar means for participants to receive an upfront benefit for agreeing to pay a cost if they should fail to reach their goals. Jon Elster describes this approach and one in which one receives a benefit for reaching a goal, but the benefit is received from money that a committing individual pays in advance, so the only difference from the costs scenario is whether the payment is made up front. ELSTER, supra note 2, at 70.
5. We use the word "commitment" in place of what the literature often refers to as "precommitment." Jon Elster notes the terminological confusion: "In Ulysses and the Sirens, I referred to this phenomenon as 'precommitment' or 'self-binding.' Others have used the terms 'commitment' or 'self-commitment.'" ELSTER, supra note 2, at 4. We use the term "commitment" to be as inclusive as possible. The word "precommitment" seems redundant because all commitments by definition are promises concerning the future. At times, we will refer to "compensating commitment bonds" simply as "commitment bonds," in part because the concept of a bond already often denotes a financial instrument where the writer of the bond receives compensation. Distinguishing between compensating and noncompensating commitments is useful because some have used the "commitment bond" term to refer to noncompensating commitments. See, e.g., Tim Harford, You Bet! My Commitment Bond Adventure, FIN. TIMES (Nov. 13, 2007, 3:15 PM), http://blogs.ft.com/undercover/ 2007/11/you-bet-my-commhtml/#axzz1mIzTZX5r.
6. The government could require someone to sell commitment bonds to overcome their limited willpower. See Lee Anne Fennell, Willpower Taxes, 99 GEO. L.J. 1371, 1416-20 (2011) (noting the possible use of willpower taxes as governmentally mandated individual commitments). We are, however, using the examples of individuals facing willpower problems to help illustrate contexts in which governments might use them to achieve governmental, as opposed to personal, ends.
7. Robert Cooter & Ariel Porat, Anti-Insurance, 31 J. LEGAL STUD. 203, 204 (2002).
8. See generally Amos Tversky & Daniel Kahneman, Loss Aversion in Riskless Choice: A Reference-Dependent Model, 106 Q. J. ECON. 1039 (1991) (exploring the evidence for and consequences of losses having greater impact than gains).
9. See generally Thomas Kelly, Sunk Costs, Rationality, and Acting for the Sake of the Past, 38 NOÛS 60 (2004) (exploring the sunk cost fallacy and arguing that honoring sunk costs is sometimes rational).
10. See, e.g., Fernando S. Machado & Rajiv K. Sinha, Smoking Cessation: A Model of Planned vs. Actual Behavior for Time-Inconsistent Consumers, 26 MARKETING SCI. 834 (2007) (exploring the implications of hyperbolic discounting and time inconsistency among smokers).
11. See Ted O'Donoghue & Matthew Rabin, Doing It Now or Later, 89 AM. ECON. REV. 103, 109 (1999).
12. See, e.g., Jonathan Gruber & Botond Köszegi, Is Addiction "Rational"? Theory and Evidence, 116 Q. J. ECON. 1261, 1279 (2001) (labeling a subset of hyperbolic discounters as "naïve" because "they do not understand that they cannot make consistent plans through time").
13. Ted O'Donoghue & Matthew Rabin, Optimal Sin Taxes, 90 J. PUB. ECON. 1825, 1828 (2006).
14. See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972);
15. see generally IAN AYRES, OPTIONAL LAW: THE STRUCTURE OF LEGAL ENTITLEMENTS (2005) (proposing and exploring an option-based system for legal entitlements).
16. Most obese people want to lose a lot more than a realistic 10% of their body weight. A 1997 study of obese dieters found that the participants' mean weight loss goal was to lose more than 30% of their initial weight. See Gary D. Foster et al., What Is a Reasonable Weight Loss? Patients' Expectations and Evaluations of Obesity Treatment Outcomes, 65 J. CONSULTING & CLINICAL PSYCHOL. 79, 81 (1997).
17. The National Institutes of Health recommend an initial goal of about 10%. Weight Loss, NAT'L HEART LUNG & BLOOD INST., http://www.nhlbi.nih.gov/ guidelines/obesity/e-txtbk/txgd/4311.htm (last visited Jan. 2, 2011).
18. The auction equally could be conducted as a silent auction, with the bidder offering the lowest X announced as the winner when the bids are revealed. The contract would then be for that value of X, or alternatively for the second-lowest value of X. This would make the auction akin to a Vickrey second-price auction, which induces bidders to make the most favorable bids that they would be willing to accept. See William Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, 16 J. FIN. 8, 20-23 (1961).
19. An analogous commitment auction was proposed to privatize the setting of bail bonds to assure that defendants had a sufficient probability of showing up for their trial. See Ian Ayres & Joel Waldfogel, A Market Test for Race Discrimination in Bail Setting, 46 STAN. L. REV. 987, 1037-38 (1994). (Pubitemid 24803277)
20. If individuals have information about how good they are at losing weight, then individuals who are relatively good at losing weight will be more apt to sell weight loss commitment bonds, and the prices of all such bonds will be significantly discounted. Cf. George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q. J. ECON. 488 (1970) (discussing an analogous problem in the used car market).
21. See John O. McGinnis & Michael B. Rappaport, Essay, Symmetric Entrenchment: A Constitutional and Normative Theory, 89 VA. L. REV. 385, 391-416 (2003).
22. Eric A. Posner & Adrian Vermeule, Essay, Legislative Entrenchment: A Reappraisal, 111 YALE L.J. 1665, 1668-70 (2002).
23. Stewart E. Sterk, Retrenchment on Entrenchment, 71 GEO. WASH. L. REV. 231, 240-44 (2003).
24. See Frederick Schauer, Too Hard: Unconstitutional Conditions and the Chimera of Constitutional Consistency, 72 DENV. U. L. REV. 989, 994 (1995) (stating that the "rhetoric of 'the government cannot do indirectly what it cannot do directly' was poppycock if taken seriously").
25. See, e.g., Richard A. Epstein, Foreword: Unconstitutional Conditions, State Power, and the Limits of Consent, 102 HARV. L. REV. 4, 103 (1988);
26. Cass R. Sunstein, Why the Unconstitutional Conditions Doctrine Is an Anachronism (with Particular Reference to Religion, Speech, and Abortion), 70 B.U. L. REV. 593, 595 (1990).
27. CONTRACT WITH AMERICA: THE BOLD PLAN BY REP. NEWT GINGRICH, REP. DICK ARMEY, AND THE HOUSE REPUBLICANS TO CHANGE THE NATION (Ed Gillespie & Bob Schellhas, eds., 1994).
28. See, e.g., Paul Brest, Palmer V. Thompson: An Approach to the Problem of Unconstitutional Legislative Motive, 1971 SUP. CT. REV. 95;
29. John Hart Ely, Legislative and Administrative Motivation in Constitutional Law, 79 YALE L.J. 1205 (1970).
30. See, e.g., Frank H. Easterbrook, Statutes' Domains, 50 U. CHI. L. REV. 533, 547 (1983) (arguing that Arrow's Impossibility Theorem suggests that the concept of a single discernible legislative intent may be a fiction).
31. An analogous doctrine is hard look review, and evidence suggests that judges' political affiliations affect decision making in this context. See, e.g., Thomas J. Miles & Cass R. Sunstein, The Real World of Arbitrariness Review, 75 U. CHI. L. REV. 761, 767 (2008) (summarizing empirical evidence in the EPA and the NLRB context).
32. See Harold J. Krent, Reconceptualizing Sovereign Immunity, 45 VAND. L. REV. 1529, 1561 (1992).
33. See Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 732-33 (1984) (rejecting reverse incorporation of the Contracts Clause). For a discussion of the historical background explaining why the Contracts Clause applies only to the states, see Michael W. McConnell, Contract Rights and Property Rights: A Case Study in the Relationship Between Individual Liberties and Constitutional Structure, 76 CALIF. L. REV. 267, 276-83 (1988).
34. Though specifically targeted at Civil War debt, the Clause is written in general terms. See Michael Abramowicz, Beyond Balanced Budgets, Fourteenth Amendment Style, 33 TULSA L.J. 561, 582 (1997);
35. see also Phanor J. Eder, A Forgotten Section of the Fourteenth Amendment, 19 CORNELL L.Q. 1, 15 (1933) (concluding that "the intention was to lay down a constitutional canon for all time in order to protect and maintain the national honor and to strengthen the national credit").
36. See KENNETH S. ABRAHAM, DISTRIBUTING RISK: INSURANCE, LEGAL THEORY, AND PUBLIC POLICY 14 (1986) (defining moral hazard as the "tendency of an insured to underallocate to loss prevention after purchasing insurance").
37. The mechanism described here is not the only market mechanism that could be used to make this assessment. An alternative approach would be to use conditional prediction markets. See MICHAEL ABRAMOWICZ, PREDICTOCRACY: MARKET MECHANISMS FOR PUBLIC AND PRIVATE DECISION MAKING 141-44, 199-204 (2008). An advantage of this approach is that it is difficult to manipulate prediction markets. See id. at 28-32.
38. Eugene Kontorovich, Liability Rules for Constitutional Rights: The Case of Mass Detentions, 56 STAN. L. REV. 755, 758-62 (2004).
39. See 41% Fine with Budget Deficit if Taxes Are Cut, RASMUSSEN REPORTS, Feb. 3, 2010.
40. See generally Theodore P. Seto, Drafting a Federal Balanced Budget Amendment That Does What It Is Supposed To Do (and No More), 106 YALE L.J. 1449 (1997) (discussing goals behind a balanced budget amendment and potential challenges to drafting and enforcing such a proposal).
41. See generally Thomas J. Downey, The Futility of Gramm-Rudman-Hollings, 25 HARV. J. ON LEGIS. 545 (1988).
42. Cf. John Shepard Wiley Jr., A Capture Theory of Antitrust Federalism, 99 HARV. L. REV. 713, 742 (1986) (noting that agencies aware of the possibility of capture have sometimes been able to undertake reforms to prevent it).
43. For discussions of the moral hazard created by economic bailouts, see, for example, Peter L. Bernstein, What's Free About Free Enterprise?, N.Y. TIMES, Sept. 28, 2008, at BU1,
44. and Sudeep Reddy & Michael R. Crittenden, U.S. News: Fed's Kohn Concedes Risk in AIG Rescue, WALL ST. J., Mar. 6, 2009, at A3.
45. See, e.g., GARY H. STERN & RON J. FELDMAN, TOO BIG TO FAIL: THE HAZARDS OF BANK BAILOUTS (2004) (discussing the problem of credibility and the degree to which governments will not let big banks fail).
46. See Christopher Thorson, Proposals to Reduce Systemic Risk Compared, Developments in Banking and Financial Law: 2009, 28 REV. BANKING & FIN. L. 458, 459-60 (2009) (noting that the possibility of contagion can increase systemic risk).
47. See, e.g., Edmund S. Phelps, Phillips Curves, Expectations of Inflation and Optimal Unemployment Over Time, 34 ECONOMICA 254 (1967);
48. Lars E.O. Svensson, Open-Economy Inflation Targeting, 50 J. INT'L ECON. 155 (2000).
49. See Kenneth Rogoff, The Optimal Degree of Commitment to an Intermediate Monetary Target, 100 Q.J. ECON. 1169, 1177-88 (1985);
50. see also Alan S. Blinder, Central-Bank Credibility: Why Do We Care? How Do We Build It?, 90 AM. ECON. REV. 1421, 1423-24 (2000) (arguing that central bankers may appear more credible if they have a strong aversion to inflation).
51. See, e.g., Stanley Fischer, Modern Central Banking, in THE FUTURE OF CENTRAL BANKING: THE TERCENTENARY SYMPOSIUM OF THE BANK OF ENGLAND 262 (Forrest Capie et al. eds., 1994);
52. Alberto Alesina & Lawrence H. Summers, Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence, 25 J. MONEY, CREDIT & BANKING 151 (1993);
53. See generally MILTON FRIEDMAN, A PROGRAM FOR MONETARY STABILITY (1960) (proposing that the money supply should be increased at a fixed constant rate equivalent to the growth in GDP).
54. See, e.g., Louis Kaplow, Incentives and Government Relief for Risk, 4 J. RISK & UNCERTAINTY 167 (1991).
55. For a proposal that monetary policy target a fixed level of nominal GDP growth, see Christina D. Romer, Dear Ben: It's Time for a Volcker Moment, N.Y. TIMES, Oct. 30, 2011, at BU6,
56. and Paul Krugman, A Volcker Moment Indeed (Slightly Wonkish), N.Y. TIMES (Oct. 30, 2011, 10:33 AM), http://krugman.blogs.nytimes.com/2011/10/30/a- volcker-moment-indeed-slightly-wonkish.
57. This example is borrowed from Eugene Volokh, The Mechanisms of the Slippery Slope, 116 HARV. L. REV. 1026, 1028, 1033-34 (2003).
58. Gun rights supporters often argue that their cause is about conserving freedom. See, e.g., Donald Braman & Dan M. Kahan, Overcoming the Fear of Guns, the Fear of Gun Control, and the Fear of Cultural Politics: Constructing a Better Gun Debate, 55 EMORY L.J. 569, 577 (2006);
59. Charlton Heston, The Second Amendment: America's First Freedom, in GUNS IN AMERICA: A READER 199, 203 (Jan E. Dizard et al. eds., 1999).
60. See, e.g., RICHARD A. POSNER, CATASTROPHE: RISK AND RESPONSE 118 (2004) (noting the problem in the context of global warming).
61. See, e.g., Melvin A. Eisenberg, The Conception that the Corporation is a Nexus of Contracts, and the Dual Nature of the Firm, 24 J. CORP. L. 819 (1999).
62. Companies that join the Chicago Climate Exchange commit to an annual 1% reduction in their greenhouse emissions, with the added incentive of gaining credits if they reduce their emissions by more than 1%. They can then sell those credits to other participants. And those who do not meet that reduction goal must buy permits. Companies voluntarily enter into this commitment with the additional reward of good publicity. See Ian Ayres & Barry Nalebuff, Your Personal Climate Exchange, FORBES (Oct. 30, 2008, 6:00 PM), http://www.forbes. com/forbes/2008/1124/148.html.
63. See Robert Cooter & Ariel Porat, Total Liability for Excessive Harm, 36 J. LEGAL STUD. 63 (2007).
64. See generally Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988);
65. Jean Tirole, Incomplete Contracts: Where Do We Stand?, 67 ECONOMETRICA 741 (1999).
66. See, e.g., Jeanne Louise Carriere, "It's Déjà Vu All Over Again": The Covenant Marriage Act in Popular Cultural Perception and Legal Reality, 72 TUL. L. REV. 1701, 1717-45 (1998).
67. See Geoffrey P. Miller, Preliminary Judgments, 2010 U. ILL. L. REV. 165, 175 ("Another impediment to settlement is the possibility that strategic bargaining may prevent the parties from reaching a compromise even though a bargaining range exists in which it would be advantageous for both to settle.").
68. For discussions on mitigating adverse selection by making insurance purchases mandatory, see, for example, Michael Abramowicz, On the Alienability of Legal Claims, 114 YALE L.J. 697, 760 (2005),
69. and Benjamin J. Richardson, Mandating Environmental Liability Insurance, 12 DUKE ENVTL. L. & POL'Y F. 293, 312-13 (2002).
70. See, e.g., William F. Samuelson, Final-Offer Arbitration Under Incomplete Information, 37 MGMT. SCI. 1234, 1243-44 (1991).
71. See John J. Donohue III, Commentary, Opting for the British Rule, Or if Posner and Shavell Can't Remember the Coase Theorem, Who Will?, 104 HARV. L. REV. 1093, 1099-1109 (1991) (observing that parties can contract around the default rules for paying fees).
72. See Michael L. Moffitt, Customized Litigation: The Case for Making Civil Procedure Negotiable, 75 GEO. WASH. L. REV. 461, 469-72 (2007).
73. Mark Wu, Antidumping in Asia's Emerging Giants, 53 HARV. INTL. L.J. (forthcoming 2012).
74. See Jide Nzelibe, The Credibility Imperative: The Political Dynamics of Retaliation in the World Trade Organization's Dispute Resolution Mechanism, 6 THEORETICAL INQUIRIES L. 215 (2005).
75. For instance, Worldwide Governance Indicators has measured rule of law worldwide. See Daniel Kaufmann, Aart Kraay & Massimo Mastruzzi, Rule of Law, WORLDWIDE GOVERNANCE INDICATORS PROJECT, http://info.worldbank.org/governance/ wgi/worldmap.asp (last visited Dec. 30, 2011).
76. James Hurman, Smoking Habit for Sale, YOUTUBE (Feb. 22, 2008), http://www.youtube.com/watch?v=UBf1OShZvJ0.
77. A longer description of Hurman's auction story appeared in IAN AYRES, CARROTS AND STICKS: UNLOCK THE POWER OF INCENTIVES TO GET THINGS DONE 57-60 (2010);
78. see also Stephen J. Dubner, Smoking Habit for Sale, FREAKONOMICS (Mar. 12, 2008, 1:40 PM), http://www.freakonomics.com/2008/03/12/smoking-habit-for- sale/;
79. Smoking Habit Contract, TRADEME http://www.trademe.co.nz/Browse/Listing. aspx?id=146646769 (last visited Nov. 6, 2011). Hurman promised to donate the proceeds from the auction to the Cancer Society of New Zealand. Hurman, supra.