Volume 77, Number 1

April 2002

Switching the Default Rule

Cass R. Sunstein

There is a standard analysis of default rules in contract law, including those forms of contract law that fall under the label of employment law. But behavioral economics raises many complications. Professor Cass R. Sunstein explains that the default rule can create an endowment effect, making employees value certain rights more, simply because they have been granted such rights in the first instance. New evidence, based on a survey of law students, is introduced to show a significant endowment effect in the context of vacation time. Similarly, the default rule for savings plans, set by employers or by law, seems to have a large effect on employee behavior. When the default rule affects preferences and behavior, conventional economic analysis seems indeterminate; either default rule can be efficient. In employment law, analysis of distributive consequences also suggests the difficulty of deciding which default rule to favor, because any switch in the rule is unlikely to have significant redistributive effects. Nonetheless, switching the default rule can, in certain circumstances, have desirable effects on workers’ welfare. A central question is whether the stickiness of the default rule reflects a genuine change in values, or instead, employee confusion or bargaining strategy.