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Comment on Market Conditions and Contract Design: Variations in Debt Contracting

Alan Schwartz

In Response to: Market Conditions and Contract Design: Variations in Debt Contracting

This Comment attempts to explain two stylized facts: As the market interest rate rises, lenders demand either (a) more collateral, or (b) tighter covenants. In their Article, Conditions and Contract Design: Variations in Debt Covenants and Collateral, Choi and Triantis (“C&T”) use two models in their explanation of these facts: an adverse selection model and a moral hazard model. The adverse selection model formally analyzes only collateral contracts, but the authors claim that both the collateral contract and the covenant contract mitigate adverse selection. The moral hazard model also considers only collateral contracts; the claim here is that these best mitigate moral hazard.

The Article claims to derive three principal results:

(A) The likelihood that parties write collateral contracts is increasing in the market interest rate (both models). When the problem is adverse selection, this result applies to covenants as well.

(B) Good (i.e., less risky) types are more likely to offer collateral than bad types (both models);

(C) The difference in the contracts of good and bad types widens as the market interest rate increases (both models).

This Comment argues that under symmetric information, results (A) and (C) continue to hold but result (B) reverses: Bad types offer more collateral than good types. Symmetric information is the more plausible assumption in the Article’s adverse selection setup. I make three other points: (i) C&T’s moral hazard model assumes that borrowers are ex ante identical: Every borrower is equally likely to pursue a later project that disadvantages the initial lender. This setup cannot explain why some partie —lenders and borrowers—use covenants while other, apparently similar parties, use security; (ii) Letting borrowers differ ex ante may explain when parties prefer one or the other risk reduction device. In this framework, the better argument continues to be that bad types offer more collateral than good types; (iii) Turning to empirics, some data rejects C&T’s result (B): Bad types appear in fact to offer more collateral than good types. Because this data is not current, it cannot settle the issue. On the other hand, and to summarize, the data and the analysis raise the question whether C&T are using the right models for the problem.

Copying and Context: Tying as a Solution to the Lack of Intellectual Property Protection of Contract Terms

Lisa Bernstein

In Response to: Contracts as Technology

In his Article Contracts as Technology Kevin Davis makes an analogy between technological innovation and contractual innovation and suggests that contractual innovation, like technological innovation, can both add value to exchange and promote trade. Davis presents a theory of the uses and sources of contractual innovation that has at its core the idea that “[t]he principal determinant of the value of adopting a contract is the value of the changes in behavior it induces.” The Article then draws on this theory and the analogy to technological innovation to explore the incentives of law firms, businesspeople, trade associations, and a variety of nonprofit institutions to engage in contractual innovation, even though there is no equivalent of copyright, trademark, or patent protection for contractual language. It concludes that given the lack of intellectual property protection for contractual language, potential contractual innovators of all types are likely to make socially sub-optimal investments in contractual innovation.

This Comment adds to Davis’s analysis by describing the ways that standard-form contracts and trading rules are produced and used in trade associations. It suggests that many trade associations tie these contracts to other products and services they offer in ways that create contractual value for their members that is not fully available to those who might simply decide to adopt, or more aptly, copy the language of their contractual forms. As a result, association members endorse contract and trade rules revision efforts funded by membership dues even though these contracts can be copied and these rules incorporated by reference into transactions between nonmembers who in effect free ride on the associations’ costly drafting efforts. More broadly, exploring contractual innovation in the trade association context suggests that once it is recognized that the value of a contract depends as much on the institutional and interpersonal context in which it is adopted, governed, performed, and enforced as it does on the specific words used, the lack of intellectual property protection for contractual language might be far less of a barrier to contractual innovation generally than Davis suggests.

NAMUDNO’s Non-Existent Principle of State Equality

Zachary S. Price

The fifty states are unequal in many respects—population (and thus representation in the House of Representatives), wealth, resources, climate, economic foundations, and industrial and technological development, to name a few. Federal legislation, therefore, often affects states unequally, and at times even singles out particular states for special treatment. Is such legislation suspect? In dicta in Northwest Austin Municipal Utility District Number One v. Holder (NAMUDNO), the Supreme Court cryptically suggested that it might be. This term, in Shelby County v. Holder, the Court is poised to revisit the issue presented in NAMUDNO: whether section 5 of the Voting Rights Act (VRA), which imposes special requirements on certain states and jurisdictions with histories of discrimination, is constitutional. In the process, the Court could choose to give the NAMUDNO dicta some bite.

The Court should not do so. The suggestion that federal legislation must treat states equally is a chimera, without support in constitutional text, history, or precedent. It is particularly unfounded with respect to legislation, like section 5 of the VRA, that is based on Congress’s authority under the Fourteenth and Fifteenth Amendments to eradicate discriminatory denials of the right to vote. A constitutional requirement that legislation cannot treat states differently would call into question many typical legislative acts. The idea should be put to rest before it causes mischief.

The Private Life of Public Rights: State Constitutions and the Common Law

Helen Hershkoff

In this lecture, I make the positive point that some state courts do indeed indirectly enforce state constitutional norms through the common law when resolving disputes that involve only private actors, and that this practice is analytically distinct from mere policymaking. The practice allows public law to influence the content of private law in ways that may not immediately be obvious to see. I illustrate the practice, and I point to some of the common law pathways that state courts use in this process. I then make the normative argument, and try to convince you, that more state courts should embrace this practice. I close by suggesting some of the implications this practice holds for social improvement. Thinking back to my earlier career as a public interest lawyer, I was motivated by the belief that law, and especially constitutional law, can improve everyday life. I still hold that view, but I have come to see that the mechanisms of change also must include the slow, molecular motions of the common law.


Debating the Declining Influence of the United States Constitution: A Response to Professors Choudhry, Jackson, and Melkinsburg

David S. Law, Mila Versteeg

In Response to:
Comment on Law and Versteeg
Comments on Law and Versteeg’s The Declining Influence of the United States Constitution
Method in Comparative Constitutional Law: A Comment on Law and Versteeg

This brief essay responds to the commentaries by Professor Choudhry, Professor Jackson, and Professors Elkins, Ginsburg, and Melton (“Melkinsburg”) on our article, The Declining Influence of the United States Constitution. We agree with much of the substance of their thoughtful commentaries, especially their calls for methodological pluralism and broader-ranging empirical research. Some of our differences, meanwhile, are matters of emphasis and framing. For example, their point that the U.S. Constitution remains influential upon constitution writing at a high level of abstraction is one that we make ourselves. We also emphasize, however, that highly abstract similarities are no indication that constitutional drafters in other countries find the U.S. Constitution a useful or attractive model to emulate as a practical matter.

Our most significant disagreement lies with two of Melkinsburg’s arguments. First, they contend that we have misinterpreted our empirical findings of declining similarity to the U.S. Constitution as evidence of declining influence. We reject their suggestion, however, that the U.S. Constitution can only be said to have lost influence to the extent that its “essential elements” have been repudiated. No definition of a concept such as influence can be proclaimed exclusively correct by fiat. Moreover, their definition comports neither with intuition nor with our goal of identifying where constitutional drafters today look for inspiration.

Second, they argue that the trends we identify as belonging to the late twentieth century are merely continuations of trends that actually began in the mid-nineteenth century. In our view, their analysis gives insufficient consideration to two dynamics that render post–World War II constitutional trends qualitatively distinct from nineteenth-century trends. Those two dynamics are constitutional proliferation, meaning an explosion in the sheer number of constitutions, and constitutional standardization, or the increasing use of increasingly standard constitutional models that bear limited resemblance to the U.S. Constitution. Constitutional drafting today reflects the emergence of pockets of consensus in a densely populated constitutional environment that simply did not exist in the mid-nineteenth century or even the early twentieth century. Any conclusions that Melkinsburg draw from ostensibly global nineteenth-century data are likely to be disproportionately influenced by the atypical experience of Latin American constitutionalism. Our focus, by contrast, is upon a late twentieth-century process of constitutional standardization that ultimately bypassed the U.S. Constitution in favor of a more genuinely global synthesis.

Comment on Law and Versteeg

Vicki C. Jackson

In Response to: The Declining Influence of the United States Constitution

David Law and Mila Versteeg have used their considerable legal and empirical skills to identify what they provocatively describe as the “declining influence of the U.S. Constitution,” or of what they sometimes call “American constitutionalism.” This claim has been headline-grabbing in important part because of the larger sociolegal context, in which the question of American hegemony in the world of global politics and economics is deeply unsettled. Declining influence in the design of constitutions thus resonates with a larger set of anxieties about the role of the United States in the world.

An alternative to seeing greater variations among constitutional instruments as a sign of decline in the influence of the U.S. Constitution within a framework of power hierarchy and competition, is instead to see the increased variations in a framework of evolution and diffusion, and as a sign of the success—not the failure—of the U.S. constitutionalist project. To read “decline” into greater variation may, then, be simply a reflection of anxieties in other spheres, rather than a troublesome development in its own right. In the rest of this comment, I offer brief thoughts on the influence of the U.S. Constitution and on the challenges of accurately and completely tracking such influence. I close with some questions about whether and why influence matters.

Comments on Law and Versteeg’s The Declining Influence of the United States Constitution

Zachary Elkins, Tom Ginsburg, James Melton

In Response to: The Declining Influence of the United States Constitution

It was with great interest that we read David Law and Mila Versteeg’s thoughtful article on the influence of the U.S. Constitution. Their piece contributes some very useful and clearly drawn empirical benchmarks, which will undoubtedly advance the conversation about the historical role of the U.S. Constitution in interesting and even provocative ways. Law and Versteeg provide many empirical nuggets to consider. We take the opportunity here to examine and elaborate upon two of their central themes: (1) the historical trajectory and timing of drift from the U.S. Constitution; and (2) whether such drift should be understood as a decline in influence. In some sense, our analysis complements and extends theirs. Appealing to a broader set of data, we clarify the timing and magnitude of any drift away from U.S. constitutional principles. However, we also offer a very different version of history than they do. If one pushes further than do Law and Versteeg with respect to the conceptualization and measurement of constitutional similarity, two trends are apparent. First, constitutions have incrementally and regularly taken on new bells and whistles; we call this constitutional modernization. Second, despite this modernization, the influence of the U.S. Constitution remains evident; in fact, it has become increasingly more central compared to competing nineteenth-century alternatives.

Method in Comparative Constitutional Law: A Comment on Law and Versteeg

Sujit Choudhry

In Response to: The Declining Influence of the United States Constitution

Of the many questions raised by David Law and Mila Versteeg’s important article, I want to focus on two. First, as a methodological matter, do they measure constitutional convergence and divergence in the right way? Second, what is the relationship between quantitative, large-n work of the genre represented by Law and Versteeg’s article and small-n, qualitative work that has hitherto been the favored methodological approach in comparative constitutional law and politics?

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