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date: 06 June 2020

The Economics of Fiduciary Law

Abstract and Keywords

This chapter examines the treatment of fiduciary law in the field of law and economics. It begins with a typology of three theoretical tracts that accounts for loyalty in economics: the first tract takes a structural approach to questions of loyalty and disloyalty based on models occupied by strictly rational economic agents who are unable to choose or act in any manner than that dictated by narrow self-interests; the second explains loyalty in terms of personal character or preferences for particular actions and choices; and the third approaches loyalty in terms of allegiances to relationships or associations and, more specifically, to their associated rules of conduct. The chapter then discusses these three theoretical tracts of loyalty by reviewing the law and economics literature on beneficiaries and fiduciaries in general, and principals and agents in particular. The discussion is organized along lines of the two branches of scholarship that defines the field of law and economics: institutional economic analysis and economic analysis of law.

Keywords: fiduciary law, loyalty, law and economics, institutional economic analysis, economic analysis of law, moral hazard, disloyalty, principals, agents, beneficiaries, fiduciaries

I. Introduction

All economic models of agency entail a theory of loyalty. Although often implicit, one of three theoretical tracts becomes apparent on close inspection. First, and most frequently, questions of loyalty and disloyalty are viewed structurally in models occupied by strictly rational economic agents unable to choose or act in any manner than that dictated by narrow self-interest. These agents unsympathetically pursue their own interests, unrestrained by the interests of others or by other values.1 They may allow for the theoretical possibility of loyalty in others, but treat it as a nonbinding constraint over their own actions and choices, much as a man in a vacuum can recognize a theory of gravity while gravity itself exerts no force on him. In the moral vacuum of their internal workings, loyalty (or what appears to be so) is determined entirely by the external structures, situations and contexts where these agents find themselves.

In place of context and situation, the second theoretical tract accounts for loyalty in terms of personal character. Loyalty here is treated as an aspect of an economic agent’s identity or personality, which is narrowly taken as an expression of preferences or taste for particular actions and choices. As such, loyal conduct is generated not through systems of rewards and penalties (structural incentives) but from self-gratifying actions and choices that render immediate pleasure or utility. Agents’ self-interests are fulfilled directly from their apparent loyal behavior. Preference satisfaction is realized through one’s own faithful conduct and therefore this tract is characterized as self-serving loyalty.

Loyalty under the third and final tract is approached in terms of allegiances to relationships or associations and, more specifically, to their associated rules of conduct. (p. 668) Allegiance and obedience to conduct rules are, in this instance, explainable neither by context nor character alone. Loyalty in this tract goes beyond the situational determinism and revealed preferences of the structural and self-serving tracts, respectively. Allegiant loyalty, moreover, allows for the possibility of self-abnegation and thus may dislodge an agent’s actions and choices from the grip of unwavering self-interest seeking motivation taken for granted in standard economic models.

These three theoretical tracts of loyalty are explored in this chapter through a survey of the law and economics literature on principals and agents, or beneficiaries and fiduciaries more broadly. Much of this survey explores how economists (often implicitly) have theorized the loyalty of agents who intentionally undertake inadequate or otherwise inappropriate actions and choices. Hence, “loyalty” in this chapter is notionally broader than its conventional usage in fiduciary law. Across legal jurisdictions there are nominally many fiduciary duties—including obligations of candor, care, confidence, disclosure, impartiality, among many others—that are sometimes separated and sometimes subsumed under a common law duty of loyalty. Though useful in practice, as well as perhaps elsewhere, these juridical partitions are generally not maintained in this chapter, except where a surveyed writing itself makes significant use of such distinctions. Any intentional failure to exercise adequate care, keep confidences, demonstrate impartiality, avoid self-dealing, and so on may be considered a breach of loyalty and is largely treated as such in the comments that follow.

II. Loyalty in Law and Economics

Two branches of scholarship in law and economics, broadly understood, have explicitly addressed legal-economic aspects of loyalty. Institutional economic analysts, from both new and old schools, direct their attention to the influences of institutions—i.e., the “rules of the game,” including law—on economic activity and behavioral motivation.2 Though much of this scholarship is often presented in the context of “industrial organization” or “the economics of organizations” or “theories of the firm,” institutional considerations are always prior to organizations and firms. As Douglass North observed, institutions determine the game and its rules; firms and other organizations are merely players.3 (p. 669) Rules, more so than rational players, define the basis of analysis within this first branch. A second branch of law and economics scholarship—working from an individualist perspective, rather than an institutionalist one—offers a more conventional rational-actor economic analysis of law, including the fiduciary law of loyalty. As a shorthand, this chapter labels the latter branch “conventionalist” and the former “institutionalist.” Representative research from both branches of law and economics are presented in the remainder of this chapter and organized in light of the loyalty typology described previously.

Several caveats ought to be mentioned before specifically addressing this literature. First, the survey that follows is brief and incomplete. It highlights important touchpoints but does not seek to provide a comprehensive review. Second, the placement of scholars and scholarship in one camp or the other is admittedly arbitrary and therefore contestable. Ronald Coase, for instance, is famously claimed by both conventionalists and institutionalists. Third, assigning any piece of scholarship within the proposed loyalty typology is a judgment task. Some articles express no explicit or definitive view of loyalty, while others suggest multiple, sometimes competing, views. Finally, and most importantly, there is no grand intention here to assign or firmly associate scholars with any particular view of loyalty. Contrary interpretations based on different (or maybe even the same) writings by these scholars may be reasonably reached. Corrections are welcomed. Associating scholars and their work with loyalty modalities and branches of scholarship is mainly for the purpose of relating and organizing the surveyed literature.

A. Institutional Economic Analysis

In 1925 the institutionalist economist John Commons published an insightful article in the Yale Law Journal aptly titled “Law and Economics.”4 In this early contribution to the law and economics canon, Commons put his finger on the chord that has always separated conventionalist and institutionalist thought.5 He accused conventionalists of accepting too quickly Jeremy Bentham’s invitation to embrace a legal and economic theory of conduct based on optimizing “the pains and pleasures of individuals.”6 Combined with “the extreme individualism of English economists,” Commons observed, this theory “made it possible for them to assume” that giving countenance to “the selfishness of individuals was equivalent to the ethical principle of the maximum happiness of all.”7 He rejected Bentham’s rational self-interested individual as the basis of analysis. In place of a singularly self-seeking rational actor, Commons claimed “the true unit of economic theory is not an individual but a going concern composed of individuals in their many transactions of principal and agent, superior and inferior, employer and employee, seller (p. 670) and customer, creditor and debtor, bailor and bailee, patron and client, etc.”8 There is much to this claim, but for the purposes of this chapter, consider only its implications for loyalty.

Principals, superiors, employers, patrons, and the like all expect loyalty. On what basis, according to Commons, will loyalty secured? A traditional rational choice approach would look to incentives (structural loyalty) or to preferences (self-serving loyalty), but Commons considered that approach limiting, if not misleading. He instead identified what he thought to be a more promising direction in Wesley Hohfeld’s analysis of legal entitlements.9 Hohfeld’s conceptualization of entitlements was, to Commons, nothing short of a general theory of conduct rules,10 shedding light on “the way in which the common practices of any going concern control the individual members of that concern and hold them to the conduct necessary to preserve the existence of the concern.”11 Bentham’s actively self-serving and analytically isolated individual is replaced by a “person associated with others and participating in and controlled by the practices common to all.”12 And instead of relying on the “mechanical and coercive doctrines” of structural and self-serving loyalty, Commons looks to allegiant loyalty, where compliance with conduct rules may arise from “the daily habits, practices and customs of the people” embedded in relationships and associations.13

Contractual compliance offers an alternative to this “complex of habits, practices, opinions, promises and customs” operating as “a highly intractable force” (in Commons’s words) on persons in association with each other.14 These alternatives, however, are not mutually exclusive. Contracts can and often do establish a basis for the allegiant loyalty of agents. Consider, for instance, Coase’s foundational 1937 article, “The Nature of the Firm,” wherein he conceded “[i]t is true that contracts are not eliminated [by agency] but they are greatly reduced.”15 A “series of contracts” is replaced by one, which is then governed by “the legal relationship normally called that of ‘master and servant’ or ‘employer and employee.’”16 Contract creates the relationship—where “for a certain remuneration (which may be fixed or fluctuating),” an agent “agrees to obey the directions of an entrepreneur within certain limits.”17 Thereafter, it is the conduct rules and norms of masters and servants that control the everyday order and expectations within the relationship. That which is taken for granted in the relationship, normally not written in the contract, is subject to being overlooked or discounted by outsiders. Order (p. 671) under these unwritten rules often results not from expressed or implied threats, but rather from what Edmund Burke called “gentle power and liberal obedience.”18 It is no doubt easy for observers to miss or underestimate the “gentle power”—that “highly intractable force” of commands coming from one’s master.

Obedience, the correlative to the master’s authority, is the essence of what it means to be a loyal servant here. A master-servant relation, to be sure, is not a master-slave one, but that fact does not render the former simply contractual. Slavery and strict contractual compliance do not exhaust the scope of possibility for securing loyalty from servants. Coase appears to identify the loyalty of servants with a broad, though not unlimited, duty of obedience.19 As such, their actions and choices may follow from allegiant loyalty, separate and apart from incentives provided by the contract. Compliance comes not from constant consideration of incentives, but rather because the servant-agent agreed to accept and obey directions of the master-entrepreneur (again, “within certain limits”20). Implicit in Coase’s view, then, lies a claim that the law and norms governing servant-agents, as opposed to independent contractors, entitled masters to a degree of obedience, that while perhaps weaker than what was achievable under slavery or serfdom, was still stronger than that available in contemporary markets and ordinary contracts.21 Whether any such distinction remains today (a topic of much current debate), at the time of Coase’s publication one would not have to search hard for supporting evidence of his implied legal claim.22

Later commentaries on Coase’s article often failed to acknowledge, or perhaps appreciate, the actual state of master-servant law and practice during the nineteenth and early twentieth century, particularly the American variant that evolved directly from a long tradition of legislation and custom governing indentured servitude.23 For instance, Armen Alchian and Harold Demsetz countered Coase by asserting that master-servant law offered principals no special legal or economic advantage.24 To think otherwise, they wrote, “is delusion.”25 Call these principals “masters” if you will, but they cannot whip their servants or utilize any legal inducements not already found in the law of contracts. It’s all contracts, claimed Alchian and Demsetz. This claim (p. 672) that would become a rallying call for later scholars, especially those law and economics adopting a hard-line contractarian view of the principal-agent problem and its solution.

Alchian and Demsetz argue that no solution can come from the “delusion” that principals are more empowered under master-servant law than under general contract principles; principals have no distinctive rights, “no power of fiat, no power of authority, no disciplinary action any different in the slightest degree from ordinary contracting between two people.”26 Modern master-servant law, today’s agency law, tells us nothing, they might have said, about the legal and economic character of business associations. In rejecting Coase’s theory of the firm, Alchian and Demsetz offer their own vision of loyalty, one quite interestingly grounded in the limits of the division of labor. That is, transactional or technological problems (including measurement, monitoring and metering difficulties) will sometimes recommend that certain activities are better procured through teams rather than isolated individual effort. Yet a team is not just a production technology for rendering tangible commodities and services; teams also produce loyalty, which may in turn be utilized as an input factor.

An effective structural loyalty tool is therefore available, argue Alchian and Demsetz, “[i]f one could enhance a common interest in nonshirking in the guise of a team loyalty or team spirit, the team would be more efficient.”27 They present their argument as essentially instrumental: “Obviously the team is better, with team spirit and loyalty, because of the reduced shirking—not because of some other feature inherent in loyalty or spirit as such.”28 Still, well-informed readers, like Oliver Williamson, interpreted team loyalty as “utopian” vision, calling for “deep commitment to collective purposes” and uncompromising “personal subordination.”29 Strong words, but the accusation does find some support in Alchian and Demsetz’s “nonrational” claim that “[e]very team member would prefer a team in which no one, not even himself, shirked.”30 Why wouldn’t a strictly rational team member prefer to shirk when it’s in her individual self-interest? Perhaps Alchian and Demsetz imagine that the entire team is or could be made to be irrationally loyal (self-serving loyalty), or perhaps team members all have a preference to want to act loyally (a meta-preference),31 even when their immediate preferences and the incentives confronting them would recommend otherwise (allegiant loyalty). Alas, it is unclear what, exactly, grounds Alchian and Demsetz’s team theory of loyalty, and Williamson’s strong criticism may have been more inspired by Jacob Marschak and Roy Radner’s book, Economic Theory of Teams,32 itself derived from earlier work by Marschak.33

(p. 673) Marschak and Radner adopt a strong form of allegiant loyalty, at least in the “common interest” multiparty interactions they considered, wherein noncooperative conduct was assumed away. Williamson, for his own part, assumes an unflinching structural loyalty stance, showing little patience for self-suppressing allegiance and obedience arguments. While Coase could see the operation some of obedience “within limits,” Williamson saw it as all or nothing. “Obedience is tantamount to non-self-interest seeking,”34 he writes, suggesting no overlap between self-interest and allegiant loyalty. Recalling Machiavelli’s counsel to see “men as they are,” he draws on the “primitive response” in all structural loyalty models.35 Deter the natural tendency of men toward disloyalty with “appropriate safeguards.”36 His take on this old stratagem stresses the administrative efficiency of safeguards, an emphasis found in Cesare Becarria’s early “contribution to the economics of law.”37 Williamson called into question the standard principal-agent model, pointing out that it is not enough to speak only of aligning the incentives of agents with the interests of their principals; agents’ tasks must also be aligned, discriminatingly, with governance structures that economize on transaction costs.38

Another aspect of the standard approach, to which Williamson objected, was what he perceived to be a mistaken behavioral presumption in “standard economic models [that] treat ‘individuals as playing a game with fixed rules which they obey.’”39 That perception inspired him to advance a stronger notion of self-interested conduct—one more aggressively self-serving than the “simple self-interest seeking” orientation he saw in the standard models. He consequently promoted the usage “opportunism,” which Williamson defined as “self-interest seeking with guile,” including “lying, stealing and cheating,” as well as more “subtle forms of deceit.”40 Yet every aspect of the newly introduced opportunism was already captured by moral hazard or adverse selection, which were well known and taken for granted by theorists building those standard models.41 Opportunism was not only already implied, but a more straightforward (p. 674) and plausible presumption could have been drawn from the apparent failure of the models to address it explicitly.

It is inconceivable that hard-nosed neoclassical microeconomic theorists would naïvely exclude from their models all manner of opportunistic behavior, like “stealing, cheating, or defrauding potential trading partners.”42 More likely, as James Buchanan observed, “[t]he elementary exclusion of all such opportunistic behavior from analysis relies on the presumption that the effective ‘price’ of any good obtained opportunistically is as high or higher than that which confronts the person in the straightforward exchange relationship.”43 Becarria, again, anticipated this issue in the mid-eighteenth century and addressed it explicitly by modeling the trade-off between illicit and licit trade in his analysis of smuggling.44 Midcentury institutional economist and legal scholar Robert Hale later turned to the law of duress and criminal coercion to demonstrate how law draws an ever-shifting line between lawful and unlawful threats in bargains and exchanges, which it must since, as Hale observes, “all contracts are made, to avert some kinds of threats.”45 More recent writings by Gary Becker, Guido Calabresi and Douglas Melamed, Alvin Klevorick, and Avinash Dixit have continued in the method, established in 1764, of modeling an overall exchange structure with both honest and dishonest trade.46

As for the “standard economic models” referenced by Williamson, they don’t presume honesty so much as they take dishonesty for granted. A simple amendment can be suggested for interpreting these models. While more general approaches, building on Becarria, look to a broader exchange structure, the standard models reflect a more partial account, proceeding as if trade takes place within a “protective perimeter,” where opportunistic conduct is effectively policed by prohibitive shadow prices set through (p. 675) criminal law and social sanctions.47 Now that might be enough to satisfy Williamson’s concern, but for Buchanan “[s]omething remains amiss in the standard economists’ treatment, even as amended.”48 Missing from their standard treatment, he argues, wasn’t some supposed elimination of opportunistic conduct, but rather something closer to the opposite: an effort to remove all moral conduct from standard models of exchange. Exchange is rarely an amoral neutral event because most people’s preference “ordering over goods cannot be separated from the means through which goods are expected to be secured.”49

From this asserted fact, Buchanan concludes that “the attempted separation between economics and morals was, at best, an illusion that simply cannot be sustained.”50 To demonstrate the inescapable link between economics and morals, he initially appears to advance an allegiant loyalty argument, very much in line with the writings of Amartya Sen on commitment.51 “For many, perhaps most, of those who claim membership in socially organized communities,” Buchanan writes, “a descriptive model of behavior would require recognition of the presence of endogenous constraints on choice options.”52 Questions unaddressed or unanswerable, empirically or theoretically by the standard models, revealed the limits of the conventional rational self-interested approach. “Why do many persons seem deliberately to act contrary to the dictates of their own preference orderings? How can those alternatives be rejected that seem, objectively, to promise higher utility yields than those alternatives eligible for choice?”53

Buchanan’s first response to these questions might have been dictated by John Commons. “The habits, customs, conventions, and manners that characterize behavior in many social settings that we commonly observe are the outward manifestations of the endogenous constraints that are imposed on their own behavior by the individuals who participate.”54 Though hinting at allegiant loyalty, Buchanan ultimately retreats to a self-serving loyalty position, informed by (boundedly) rational self-interest: “Because of cognitive capacity limits, individuals must choose within rules; they act only within what we may call personal psychological ‘constitutions.’ But they also act within personal moral ‘constitutions,’ for the straightforward reason that they have moral tastes (values).”55 Thus, law and economics scholars of the institutionalist camp embrace each modality in the proposed loyalty typology—structural (Williamson), self-serving (Buchanan), and allegiant (Commons, Coase). Conventional law and economics scholars, as described in the following section, tend to restrict their reach to structural loyalty arguments, though showing variation within that modality.

(p. 676) B. Economic Analysis of Law

Conventional law and economics analysis of loyalty was presaged by the collaboration between an institutionalist economist, Gardiner Means, and a corporate lawyer, Adolf Augustus Berle Jr. In their The Modern Corporation and Private Property, Berle and Means described the separation of ownership and control (with the attendant concerns over divided loyalties that Adam Smith observed in eighteenth-century joint stock companies) as the principal problem facing nineteenth- and twentieth-century industrial corporations.56 Berle and Means saw the problem as essentially one of agency, but the solution they imagined was significantly grounded in the law of trusts.57 Economic analysis of loyalty, proper, largely replaced the “spirit of the trust metaphor,” as Lewis Kornhauser puts it, with a strictly contractual view of both the problem and its solution.58 Precipitating this change in agency’s guiding metaphor, from trust to contract, was a remarkable article by economists Michael Jensen and William Meckling.59 Though they were hardly the first economists to see agency in purely contractual terms, the clarity and force of their argument was striking. Not only was the agency relationship merely contractual, but according to Jensen and Meckling the corporation itself was nothing more than a nexus of its contractual dealings.60 Taken up with equal force by Chicago law and economic scholars, particularly Frank Easterbrook and Daniel (p. 677) Fischel, the contract metaphor would expand the structural loyalty approach in both legal and economic theory.61

To appreciate the distinctiveness of the Easterbrook and Fischel contribution, it may be useful to clarify the role of contracts and courts in the traditional economic principal-agent literature.62 One extraordinary feature of standard principal-agent model is the absence of anything hinting at fiduciary law. There are only contractual relationships, initiated when principals propose optimally designed contract offers, which agents rationally accept and perform because the terms are selected so that it is in the agents’ individual self-interest to accept and perform them. Courts play a limited role in this model because it is in no one’s interest to breach their contracts. Were breach to occur—though in the equilibrium of these models it never, or almost never,63 does—then the only action required by courts would be a specific performance order. Ordering specific performance is an entirely feasible task for a competent court here because the contract, by design, is based only on those terms that a court can verify. Enforcing the order is another matter, but again enforcing orders (or any other active participation by a court, including hearing motions or interpreting the contract) is off the equilibrium path and not meaningfully contemplated by the standard principal-agent model.

Courts carry very little burden in the standard model because all the difficulty is borne by the optimal (structural) design beforehand. It is the contracting parties, the principals and agents, who bear the specification and assignment burdens ex ante, leaving little or nothing for the court to determine ex post.64 By contrast, Easterbrook and Fischel’s structural approach to loyalty reverses the demands on the various parties. Courts become very active players under their approach and relatively less is expected of principals and agents. As they see it, an agency relation, or more generally, “a ‘fiduciary’ (p. 678) relation is a contractual one characterized by unusually high costs of specification and monitoring.”65 Suboptimal design and contractual incompleteness are almost certain to result. Courts can correct the design and complete enough of the contract ex post, however, by rationally reconstructing the bargain that the parties would have reached had their ex ante contracting costs not been prohibitive.66 As such, Easterbrook and Fischel’s approach offers a complementary structural solution to the one presented in the standard principal-agent model; it also raises complementary difficulties in shifting to the court an information burden that may be unbearable.67

Beyond ex post contractual completion by the court, Easterbrook and Fischel also suggest that the law and the courts may encourage the parties to complete the contract themselves at an interim stage, when they are better informed about relevant facts. There are two available paths, then—ex post hypothetical bargains and interim actual bargains—where fiduciary law and courts may address loyalty concerns. These paths, however, as Easterbrook and Fischel describe them, are untouched by self-serving and allegiant loyalty considerations. Their approach is purely structural and strictly contractual. Fiduciary duties, according to Easterbrook and Fischel, “have no moral footing; they are the same sort of obligations, derived and enforced in the same way, as other contractual undertakings.”68 Contracts, of course, needn’t be without a moral footing,69 but Easterbrook and Fischel’s insistent conflation of contractual undertakings with an absence of morality faithfully reflects an age-old and strident branch of structuralism in American legal and economic theory.70

Not every economic analysis of fiduciary law is so quick to dismiss all moral underpinnings from the economic and legal context. In a foundational contribution to the literature, Robert Cooter and Bradley Freedman point out that “[d]isloyalty brings (p. 679) moral condemnation” and is “viewed as immoral” when an agent exploits “the principal’s reliance, trust, and vulnerability” or when disloyalty undermines “the vitality and utility” of certain relationship or associations or “results in harm to society as a whole.”71 Yet while Cooter and Freedman are attentive to moral considerations, they undertake a conventional economic analysis, contrasting two distinct types of fiduciary wrongdoings: “first, the fiduciary may misappropriate the principal’s asset or some of its value (an act of malfeasance); and second, the fiduciary may neglect the asset’s management (an act of nonfeasance).”72 These wrongdoings are commonly characterized as breaches of the fiduciary duty of loyalty and the fiduciary duty of care, respectively, but malfeasance and nonfeasance are also commonly used, as are “self-dealing” and “shirking,” respectively. Wrongdoings in their model are curbed and corrected by legal structures—less so the ethical or moral considerations to which they allude in passing.

Cooter and Freedman’s analysis proceeds from the claim that the two types of wrongdoings are motivated by distinct structural temptations and therefore require different legal responses. Specifically, they assert that breaching a duty by appropriating another’s assets or opportunities for one’s own enrichment (i.e., self-dealing, malfeasance, breach of loyalty) is potentially profitable, and therefore more enticing than breaching a duty through a simple lack of effort (i.e., shirking, nonfeasance, breach of care).73 Cooter and Freedman then propose that the organization of fiduciary law itself provides a structural framework geared to efficiently deter these wrongdoings.74 Specifically, they conclude, the legal-institutional features of the law (i.e., burdens and standards of proof, the presumptions and the remedies provided by fiduciary law) respond distinctly to the two types fiduciary wrongdoings.75 Fiduciary law shifts the usual legal burdens and presumptions of innocence in cases involving breach of loyalty, say Cooter and Freedman, because “a fiduciary’s misappropriation is profitable and difficult to prove.”76

Not only does fiduciary law shift the presumption of innocence in breach of loyalty cases, it should as a matter of policy, argue Cooter and Freedman, because “it is appropriate for fiduciary law to infer disloyalty from its appearance.”77 Additionally, fiduciary law does, and should, expose disloyal fiduciaries to greater remedial sanctions (as compared to the usual civil penalty of compensation), including disgorgement and punitive awards, to effectively deter gainful wrongdoings. These adjustments in the law provide increased deterrence for profitable and concealable breaches of loyalty, which would otherwise create heightened temptation to engage in disloyalty. In their words, “the economic character of the fiduciary relationship embodies a deterrence problem (p. 680) for which the duty of loyalty provides a special remedy.”78 Since temptation is presumed to be weaker in cases of nonfeasance, shirking and breach of care or prudence, the law can maintain its usual civil burdens, standards, presumptions, and remedies.

A summary of the arguments so far may be useful. Whereas the standard principal-agent model relies on menus of rewards and penalties to secure loyalty (with a minimal mechanical role for law), Cooter and Freedman take the procedural and remedial features of fiduciary law to be efficient regulatory responses to the temptations of disloyalty. Easterbrook and Fischel turn to an informed court that assumes an active judicial presence, converting conduct that would otherwise be “disloyal” into contracts (i.e., to what the parties would have agreed to regarding that conduct). In their respective writings, Cooter and Freedman, on the one hand, and Easterbrook and Fischel, on the other, typify two standard approaches in economic analyses of fiduciary law. One approach tends toward efficiency analysis of the legal-institutional governance rules that regulate principals and agents (including default and mandatory rules, remedies, and procedures). The other approach assumes a strong contractarian stance, treating the entire fiduciary enterprise as default rules (including procedures and remedies) and looks to courts and default law to bring about bargains that parties would ideally reach but for prohibitive contracting and information burdens.79

These two approaches within the economic analysis of law are similarly illustrated by Saul Levmore and Eric Talley, separately, in articles on loyalty and business opportunity doctrines.80 Levmore (1988) investigates strategic delay by principals, partners, and other beneficiaries who wait to bring claims against fiduciaries they believe have wrongly taken projects or opportunities that belong, at least in part, to the fiduciaries’ principals, partners, or beneficiaries. There is often benefit in waiting to see if projects pan out before suing and, of course, there are also burdens caused by delay (e.g., as reflected in the equitable doctrine of latches). Levmore sketches these trade-offs, but rather than offering a formal model of optimal delay, he develops his arguments by scrutinizing cases involving agency, corporations, partnerships (especially), and trusts.81 (p. 681) Combining traditional doctrinal analysis with an informal law and economics approach, Levmore provides a thoughtful comparison of law’s regulation of strategic actors in the fiduciary and the contractual context.

Searching through case law and doctrine, Levmore identifies a divergent pattern: plaintiffs who strategically wait to sue their fiduciaries are apparently penalized more often than contracting parties who engage in comparable strategic delays. What explains the law’s more punitive disposition in the fiduciary context? To address this question, Levmore points to a key structural feature of private law: “Put simply, the law is more eager to do nothing than to intervene.”82 When contracting parties strategically delay, engaging in dubious but not fraudulent conduct, the law tends not to intervene.83 That’s what doing nothing means in that context. “On the other hand, when a fiduciary has behaved questionably and a beneficiary [plaintiff] delays strategically, the law can penalize [the beneficiary’s] strategic behavior by withdrawing rather than intervening.”84 That’s what doing nothing means in this context. It’s not fiduciary law per se, according to Levmore, that explains the apparent doctrinal difference, it is rather private law’s overarching hesitation to intervene.

Talley also provides a careful analysis of business opportunity cases but, unlike Levmore, he aims also to identify “an ‘optimal’ doctrine,” using a formal economic analysis.85 His analysis, like Easterbook and Fischel’s, departs from a basic information problem that prevents the parties from devising an efficient ex ante contract. Parties in Talley’s model are asymmetrically informed, however, which is to say that agents possess private unverifiable information about projects and opportunities that arise. Like Easterbook and Fischel, again, Talley “adopts a normative account of corporate law with an unambiguously ‘contractarian’ flavor,” and seeks to fashion “a rule that replicates [what] the parties themselves would have bargained for ex ante had they anticipated [the relevant] contingencies.”86 Talley’s hypothetical bargains, however, differ from Easterbrook and Fischel’s because the court capacity to play any ex post verification role is prevented by the information structure—i.e., agents possess private nonverifiable information. Hence, Talley’s proposed solution would offer agents additional incentives to share their private information. Additional incentives for better-informed agents (known as “information rents”) come at the cost, however, of sacrificing some ex post efficiency. A basic trade-off thus results, the contours of which Talley outlines with his contractarian approach.

Some economic analyses of fiduciary law embrace both the contractarian and regulatory governance approaches described earlier. For instance, in several articles applying economic analysis to agency and trust law, Robert Sitkoff emphasizes the contractual (p. 682) element of these areas of law,87 while also acknowledging a mandatory noncontractual core of fiduciary law.88 Mandatory elements of fiduciary law regulate the internal order of the fiduciary-beneficiary relationship, as well as, more importantly, its external manifestation.89 Sitkoff refers to this as “the external categorization function, the mandatory core [that] addresses the need for clean lines of demarcation across types of legal relationships, among other things to minimize third-party information costs.”90 Providing clean lines is an important function of law, as Levmore described in his early contribution, although he himself was “not wedded to a view of fiduciary law[,] that takes categories such as partnership, corporation, agency, trust, and contract, terribly seriously.”91 Still he recognized “the familiar and sensible idea that a legal system that makes these distinctions may lower transaction costs by offering parties a number of pre-specified arrangements from which to choose.”92 Beyond making it easier for parties to channel their aims through pre-specified forms, law’s operation here also makes it easier for them to signal the nature of their arrangements by allowing others to observe the form chosen and infer the rights, obligations, and commitments that ensue.

In this vein, a number of economic analyses have approached fiduciary law as a means of signaling and committing to third parties. For instance, Hart and, separately, Brooks have each argued that weakening the bonds (or perhaps better put, “broadening the scope”) of fiduciary obligation may offer an efficient solution to holdup problems.93 These arguments are, in part, based on the distinctiveness and relevance of corporate personality, a concept rejected out of hand by Jensen and Meckling, who felt “that the personalization of the firm is seriously misleading.”94 But nothing about corporate personality contradicts Jensen and Meckling’s view of the contractual corporation. (p. 683) Contracting, in fact, presupposes legal personality. True enough, we could replace the term “personality” with “entity” or “right-and-duty-bearing unit” and retain an adequate contractual referent. Personalization, however, does more than provide a point of reference. When we personalize things, connections are established which may serve as a basis for ongoing relationships and credible commitments.

To see this, consider a nexus of N contracts between a firm and its various contractual partners, potentially including shareholders, bondholders, various commercial and trade creditors, employees, customers, and so on, indexed by i={1,2,3, …,N}. Define the value that the firm derives from each contractual relationship as vi(ei, ·), where ei is some measure of noncontractable effort or investment made by the firm’s contractual partner, i, that monotonically increases the firm’s value of the contract.95 For instance, the firm may want an employee to engage in human capital development specific to the firm or it may desire that a supplier make some asset-specific investment. Suppliers and employees may hesitate, however, to make efficient investments fearing they will be held up by the firm through some implicit or explicit renegotiation of the original noncontractable agreement.96 A solution may be reached by expanding the scope corporate loyalty to embrace relevant stakeholder groups through bylaws or charters97 or otherwise manipulating the corporate personality itself by giving it a more efficient identity.98

Personality, role and commitment also feature prominently in another line of law and economic inquiry into fiduciaries, arising out of the burgeoning fields of behavioral economics and experimental law and economics. How might the motivations and biases of individuals change when they self-consciously act within the role of an agent or fiduciary? An important question, to be sure, an initial answer to which was offered by Jennifer Arlen, Matthew Spitzer, and Eric Talley.99 Their experimental findings reveal that subjects situated as agents exhibited less of an endowment effect in trading transactions. Arlen and Stephan Tontrup build on this finding by showing that parties acting as principals often deliberately engage agents to curb their own biases (i.e., self-debiasing to limit “nonrational” anticipated regret, loss aversion, and so on).100 More recent experimental work by Tontrup suggests that the endowment effect may disappear entirely when (p. 684) agents are employed in markets where parties trade solely for profit.101 In addition, Sven Hoeppner, Russell Korobkin, and Alexander Stremitzer demonstrate that fiduciary relationships may encourage agents to keep promises they would breach if acting on their own behalf (given the same incentives) because of the moral force of loyalty to their principals.102 On the other hand, agency may create “moral wiggle room” and less promise-keeping when agents feel neither personally committed to promise’s fulfillment nor loyalty to their principals.

Regrettably, constraints of space and scope prevent further review of the extensive law and economics literature touching on agency and fiduciary law, including important recent empirical research, of a nonexperimental nature, by Schanzenbach and Sitkoff.103 Yet, it would be an egregious oversight if I failed to provide at least a passing reference to some other notable contributors to the field, such as Jonathan Macey, on whose analysis of fiduciary law Hart largely relies,104 as well as early contributions by Henry Manne,105 Alison Grey Anderson,106 and W. Bishop and D. D. Prentice.107 Indeed, an appropriate closing comment on a central theme running through the economic analysis of loyalty (and more broadly law) may be found in writings of the great provocateur Manne, whose arguments in defense of insider trading challenged all settled beliefs of fiduciary loyalty in that context.108 Manne, more than most, embodied and echoed the structural strain of economic analysis of law portended by Oliver Wendell Holmes Jr. Recalling Henry Adams’s famous quip, Manne wrote: “Morals, someone once said, are a private luxury. Carried into the arena of serious debate on public policy, moral arguments are frequently either sham or a refuge for the intellectually bankrupt.”109 Although Manne doesn’t speak for the field, there’s no denying the broad reception of his sentiment in the economic analysis of fiduciary law. Contrast that sentiment with the view of the institutionalist James Buchanan, who insisted that all efforts to separate economic analysis from morals was, at best, an unsustainable illusion.

(p. 685) III. Conclusion

This chapter has offered a survey and typology of the law and economics scholarship concerning loyalty, including structural, self-serving, and allegiant loyalty. A principal aim of the survey is to draw the fiduciary law community’s attention to ideas and writings on loyalty by institutional law and economics scholars. Their general absence from fiduciary law discourse is puzzling. These are not unknown academics working on fringe theories of contracts, constitutions, corporations, and more broadly the relations between principals and agents. Buchanan, Coase, Hart, North, and Williamson have all received Nobel prizes for their work on these topics. Moreover, these scholars, along with Alchian, Commons, Demsetz, and Hale, published their research in law reviews, as well as in economics journals. Additionally, a number of conventional law and economics scholars whose work may not be fully appreciated (or known) are highlighted by the survey.

A second aim of the survey is to categorize the scholarship according to distinct loyalty modalities in order to illustrate and test the utility of the typology. These distinctions, as with all socially determined distinctions, are of course contestable. One can imagine close cases where it would be difficult to assign an agent’s loyalty to one category or another. Furthermore, the three modalities are easily and closely connected. Structural incentives may be established to influence preferences and character; self-serving loyalty may be drawn into a structural apparatus; and surely allegiant loyalty (with proper accounting for self-interest) may be regarded structurally and may certainly impact character. These are only a few of the possible permutations. Nevertheless, the basic outlines of the typology presented may serve as a useful point of departure to collect, catalog, and potentially refine and build upon the models and conceptions of loyalty not only in law and economics, but perhaps in other disciplines as well.


(1) Amartya Sen refers to this as “[g]oal-priority: Each player pursues his or her goal subject to feasibility considerations, without being restrained by any other values.” Amartya Sen, Goals, Commitment, and Identity, 1 J.L. Econ. & Org. 341, 343 (1985) (emphasis added). The economic tracts of loyalty are elaborated in Richard R. W. Brooks, Loyalty and What Law Requires (2018) (manuscript on file with the author).

(2) See Herbert Hovenkamp, The First Great Law & Economics Movement, 42 Stan. L. Rev. 993 (1990); Terence W. Hutchison, Institutionalist Economics Old and New, 140 J. Institutional & Theoretical Econ. 20 (1984); Malcolm Rutherford, Institutional Economics: Then and Now, 15 J. Econ. Persp. 173 (2001).

(3) Distinguishing “institutions from organizations is crucial if one is to get a handle on the dynamics of institutional change. Institutions are the rules of the game and organizations are the players.” Douglass North, Institutions and Credible Commitment, 149 J. Institutional & Theoretical Econ. 11, 12 (1993). North’s is not the only understanding of that distinction in economics. See, e.g., Avinash K. Dixit, Lawlessness and Economics (2004) (observing that institutions may also be usefully described in terms of regularities and equilibria); Avner Greif, Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders Coalition, 83 Am. Econ. Rev. 525 (1993) (treating organizations as a kind of institution, along with rules, beliefs, and norms); Avner Greif, The Fundamental Problem of Exchange, 4 Rev. Eur. Econ. Hist. 251 (2000).

(4) John R. Commons, Law and Economics, 34 Yale L.J. 371 (1925).

(5) Better known is Commons’s 1924 book, The Legal Foundations of Capitalism, but the 1925 article and other related works have received some attention. See, e.g., Warren J. Samuels, John R. Commos (1862–1945), in The Elgar Companion to Law and Economics (Jürgen G. Backhaus ed., 2d ed. 2005); Hovenkamp, supra note 2, at 993; Herbert Hovenkamp, Coase, Institutionalism, and the Origins of Law and Economics, 86 Ind. L.J. 49 (2011).

(6) Commons, supra note 4, at 371.

(7) Id.

(8) Id. at 375.

(9) Wesley N. Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning, 26 Yale L.J. 710 (1917).

(10) Legal analytical approaches, like Hohfeld’s, clarifying the influence of conduct rules (i.e., “institutional” or “working” rules) on actual practice, was what Commons took to be “the grand contribution which the science of law gives to the science of economics.” Commons, supra note 4, at 376.

(11) Commons, supra note 4, at 375 (emphasis added). “These principles are just as applicable to the shop rules of an industrial concern, or to the ethical rules of a family or any of the many cultural concerns, as they are to the supreme political concern.” Id.

(12) Id. at 376.

(13) Id.

(14) Id.

(15) Ronald H. Coase, The Nature of the Firm, 4 Economica 386, 391 (1937).

(16) Id. at 403.

(17) Id. at 391 (first emphasis added; latter in the original).

(18) Edmund Burke, Reflections on the French Revolution 128 (1790).

(19) As he notes, “[i]t would be possible for no limits to the powers of the entrepreneur to be fixed,” but “such a contract would be void and unenforceable.” Coase, supra note 15, at 391.

(20) Id.

(21) See id at 368–405; see generally Oliver E. Williamson, The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (1964).

(22) See e.g., Fuller’s almost casual reference to the accepted “rule of law that the servant is bound to obey the reasonable commands of his master.” Lon L. Fuller, Consideration and Form, 41 Colum. L. Rev. 799, at 808 (1941). See also, section 385 (Duty to Obey) in Restatement of the Law of Agency (1933).

(23) See Christopher L. Tomlins, Freedom Bound: Law, Labor, and Civic Identity in Colonizing English America 1580–1865 (2010); Christopher L. Tomlins, The Ties That Bind: Master and Servant in Massachusetts, 1800–1850, 30 Labor Hist. 193 (1989).

(24) See Armen A. Alchian & Harold Demsetz, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972).

(25) Id. at 777.

(26) Id. at 777–778.

(27) Id. at 790 (emphasis added).

(28) Id. Alchian and Demsetz argue that “[c]orporations and business firms try to instill a spirit of loyalty.” Id. at 791. This spirit of loyalty “can be preached with an aura of moral code of conduct a morality with literally the same basis as the ten commandments,” yet “[t]he difficulty, of course, is to create economically that team spirit and loyalty.” Id.

(29) Oliver E. Williamson, The Economic Institutions of Capitalism 49 (1985).

(30) Alchian & Demsetz, supra note 23, at 790 (emphasis added).

(31) See Amartya Sen, Rationality and Freedom (2002).

(32) See J. Marschak & Roy Radner, Economic Theory of Teams (1972).

(33) See J. Marschak, Elements for a Theory of Teams, 1 Mgmt. Sci. 127 (1955).

(34) Williamson, supra note 21, at 49. Williamson ties obedience to the “behavioral assumption that is associated with social engineering” and “stewardship of an extreme kind in which self-interestedness vanishes.” Id.

(35) Id. at 48.

(36) Id.

(37) Pier Luigi Porta, “Italian Enlightenment,” in Handbook on the History of Economic Analysis Volume II: Schools of Thought in Economics 92, 102 (Gilbert Faccarello & Heinz D. Kurz eds., 2016) (referring to Becarria’s An Essay on Crimes and Punishments (1764)).

(38) See Williamson, supra note 21, at 48–49 (“Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised em ex ante … Incentives may be realigned and/or superior governance structures within which to organize transactions may be devised.”).

(39) Id. at 49 (quoting Peter Diamond; emphasis added).

(40) Id. at 47 (emphasis added); see also id. at 51 (describing his motivation to substitute “opportunism” for “moral hazard”).

(41) Williamson was well aware and acknowledges that moral hazard and adverse selection allowed for guile and other forms of conduct contained in his notion of “opportunism” (including “the full set of ex ante and ex post efforts to lie, cheat, steal, mislead, disguise, obfuscate, feign, distort, and confuse”). But perhaps fearing (not unreasonably) that moral hazard and adverse selection had become empty slogans in the field, he sought to emphasize the robust means of self-serving conduct implicit in opportunism. See id.

(42) James M. Buchanan, Choosing What to Choose, 150 J. Institutional & Theoretical Econ. 123, 124 (1994).

(43) Id.

(44) See Cesare Becarria, An Attempt at an Analysis of Smuggling, Il Caffe (1764), reprinted in Precursors of Mathematical Economics: An Anthology (W. J. Baumol & S. M. Coldfeld eds., 1968). Becarria’s mathematical model was built around a pervasive problem of states in their regulation traders who would consider legally sanctionable trade. When a state taxes imported goods with a custom duty and confiscates smuggled goods, then the trader debating whether to engage in illegal smuggling faces “an inducement and a deterrent”; as Reghinos Theocharis put it, “the inducement is that, if he is successful, he will make a profit equal to the tax he has not paid; the deterrent is that if he is caught, he will lose the value of his wares.” With a simple formal model Becarria was to clearly demonstrate that “[t]he higher the duty, the more profitable therefore becomes smuggling,” among other insights. Reghinos D. Theocharis, Early Developments in Mathematical Economics 21–22 (1961).

(45) Robert L. Hale, Bargaining, Duress and Economic Liberty, 43 Colum. L. Rev. 603, 612 (1943); see also Common’s discussion on threats of “withholding” and physical, economic, and moral power, in John R. Commons, The Legal Foundations of Capitalism 53–59 (1924).

(46) See Avinash K. Dixit, Lawlessness and Economics: Alternative Modes of Governance (2004); Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. Pol. Econ. 169 (1968); Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972); Alvin K. Klevorick, On the Economic Theory of Crime, in Nomos XXVII: Criminal Justice (Ronald Pennock & John W. Chapman eds., 1985).

(47) See Hart’s discussion of Bentham’s categories of legal rights, especially the analysis liberty-rights plausibly proceeding under the protective perimeter of criminal law and other rules limiting “cruder forms interference” of fine tuned entitlements. H. L. A. Hart, Essays on Bentham: Jurisprudence and Political Theory 171 (1982).

(48) Buchanan, supra note 41, at 126.

(49) Id. at 127.

(50) Id. at 128.

(51) See generally Sen, supra note 1.

(52) Buchanan, supra note 41, at 132.

(53) Id. at 126.

(54) Id. at 132.

(55) Id. at 133.

(56) See Adolf A. Berle, Jr., & Gardiner C. Means, The Modern Corporation and Private Property 119–125 (1932).

(57) In the same year that The Modern Corporation and Private Property was released, the Harvard Law Review published a famous debate between Adolf Berle and Merrick Dodd, Jr., with Berle staking out the claim that agents are obligated solely to stockholders (i.e., the “shareholder primacy” argument) and Dodd countering with an argument of agent “responsibility conceived not merely in terms of stockholders’ rights, but in terms of economic government satisfying the respective needs of investors, workers, customers, and the aggregated community.” A. A. Berle, Jr., For Whom Corporate Managers Are Trustees: A Note, 45 Harv. L. Rev. 1365, 1372 (1932); E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1145–1163 (1932). Yet while Berle and Dodd debated to whom corporate agents were obligated, both seemed to treat the agency relationship as closer to trust than contract. “The agent himself … owes something more than a contract duty toward his principal. He is a fiduciary who must loyally serve his principal’s interests.” Id. at 1145.

(58) Lewis A. Kornhauser, The Nexus of Contracts Approach to Corporations: A Comment on Easterbrook and Fischel, 89 Colum. L. Rev. 1449, 1449 (1989). For similar views, see also Richard A. Epstein, Contract and Trust in Corporate Law: The Case of Corporate Opportunity, 21 Del. J. Corp. L. 1 (1996); and John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 Yale L.J. 625 (1995).

(59) See Michael C. Jensen & William J. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 308 (1976) (“We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.”) (emphasis added). For further discussion of this approach, see Eugene F. Fama, Agency Problems and the Theory of the Firm, 88 J. Pol. Eco. 288 (1980); Michael C. Jensen, Organization Theory and Methodology, 58 Account. Rev. 319, 331 (1983).

(60) See Jensen & Meckling, supra note 58, at 308 (“Contractual relations are the essence of the firm, … most organizations are simply legal fictions which serve as a nexus for a set of contracting relationships among individuals.”) (emphasis in original).

(61) See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law (1996); Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. & Econ. 425 (1993); Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 Colum. L. Rev. 1416, 1416 (1989).

(62) See, e.g., Sanford J. Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7, 7–45 (1983); Milton Harris & Artur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231, 231–259 (1979); Bengt Hölmstrom, Moral Hazard and Observability, 10 Bell J. Econ. 74, 74–91 (1979); Stephen A. Ross, The Economic Theory of Agency: The Principal’s Problem, 63 Am. Econ. Rev. 134, 134–139 (1973); Michael Rothschild & Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, 90 Q. J. Econ. 629, 629–649 (1976); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, 10 Bell J. Econ. 55, 55–73 (1979); Michael Spence & Richard Zeckhauser, Insurance, Information, and Individual Action, 61 Am. Econ. Rev. 380, 380–387 (1971).

(63) A small possibility of breach may be sustainable in interactions analyzed by so-called “trembling hand” equilibrium solution concepts, where some unintended tremble or “slip of the hand” leads the parties to an unanticipated outcome off the equilibrium path. See Reinhard Selten, A Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games, 4 Int’l J. Game Theory 25 (1975).

(64) See Richard R. W. Brooks, Knowledge in Fiduciary Relations, in Philosophical Foundations of Fiduciary Law 225, 231–232 (Andrew S. Gold & Paul B. Miller eds., 2014) (“The informational demands on the parties are notable. Not only must the contract and the outcomes on which it is based be verifiable (which is all that is required of courts), but the states of the world and some belief regarding their likelihood must be known ex ante by the parties, as well as the technology and the agent’s utility derived from actions and payments.”).

(65) Easterbrook & Fischel, Contract and Fiduciary Duty, supra note 60, at 427.

(66) One can imagine that even this ex post task assumed by the court may be handled ex ante by the parties with only a slightly more sophisticated contract, wherein the parties specify a mechanism by which any gaps, vagueness, or ambiguities in the contract are to be resolved by the parties themselves, an arbitrator, or even the court. Such a solution would return us to the assumption of a high level of sophistication and knowledge possessed by the principal and agent in the standard model. See Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach, 9 J.L. Econ. & Org. 230, 232 (1993); see also Akira Konakayama et al., Efficient Contracting with Reliance and a Damage Measure, 17 Rand J. Econ. 450 (1986); Alan Schwartz & Robert E. Scott, Contract Interpretation Redux, 119 Yale L.J. 926 (2010) (suggesting a rule of interpretations for the court to follow that may be implied or expressed in the contract by sophisticated parties).

(67) See Brooks, supra note 63, 233–235; Kornhauser, supra note 57, at 1451–1457.

(68) Easterbrook & Fischel, Contract and Fiduciary Duty, supra note 60, at 427.

(69) See, e.g., Charles Fried, Contract as Promise (1981).

(70) “One of the many evil effects of the confusion between legal and moral ideas,” against which Oliver Wendell Holmes railed, resulted from “the use of moral phraseology” in contract law. Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 458, 462–444 (1897). “Nowhere is the confusion between legal and moral ideas more manifest than in the law of contract,” he wrote, concluding: “I often doubt whether it would not be a gain if every word of moral significance could be banished from the law altogether, and other words adopted which should convey legal ideas uncolored by anything outside the law.” Id.

(71) Robert Cooter & Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, 66 N.Y.U. L. Rev. 1045, 1073 & n.90 (1991). Additionally, even though efficiency may favor “deterring fiduciary wrongdoing [with] large sanctions,” Cooter and Freedman caution that such an approach “may violate conventional morality.” Id. at 1071.

(72) Id. at 1047.

(73) Their assertion rests on assumptions that may be reasonably challenged, but we can presume it’s plausible in order to consider the basic argument of their article.

(74) Id. at 1048–1056.

(75) Id.

(76) Id. at 1048.

(77) Id. “Once the appearance of disloyalty is established, the burden shifts to the fiduciary who must prove her innocence.” Id.

(78) Id.

(79) Default rules in the Easterbrook and Fischel analysis play a key role in promoting hypothetically desired bargains, but the role of default rules in generating mutually advantageous outcomes goes beyond hypothetical agreements. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989). Moreover, just as claims that an expectation damages default rule leads to efficient allocation of resources (i.e., the “efficient breach of contract”) and therefore encourages the outcome that the parties would have specified had the ex ante transaction costs been less prohibitive, so too, suggest Gordon Smith and Daniel Lyman, might efficient fiduciary default rules be seen as furthering outcomes parties would have hypothetically bargained for in the absence of transaction costs. See D. Gordon Smith & Daniel P. Lyman, Efficient Breach of Fiduciary Duty (manuscript on file with the author). But see Deborah A. DeMott, Relationships of Trust and Confidence in the Workplace, 100 Cornell L. Rev. 1255, 1268 (2015) (“[F]iduciary law does not entertain the concept of efficient breach.”).

(80) See Saul Levmore, Strategic Delays and Fiduciary Duty, 74 Va. L. Rev. 863 (1988); Eric L. Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the Corporate Opportunities Doctrine, 108 Yale L.J. 277 (1998).

(81) See Levmore, supra note 79, at 875 (“I am not prepared to formalize further the problem of optimal delay because, although it is possible to identify some costs and benefits of delay, I do not think it is possible to say much about many of the costs and benefit.”).

(82) Id. at 907.

(83) In the contractual context, says Levmore, law displays a “general unwillingness to intervene when something less than fraud, misrepresentation, and the like is at issue.” Id.

(84) Id. at 907–908.

(85) Talley, supra note 79, at 280–281.

(86) Id. at 285. Though he acknowledges alternative accounts, Talley concludes that, “[u]ltimately, however, I find that the contractarian account is the most persuasive in the corporate opportunities context.” Id. at 281.

(87) See Robert H. Sitkoff, An Economic Theory of Fiduciary Law in Philosophical Foundations of Fiduciary Law 202 (Andrew Gold & Paul Miller eds., 2014) [hereinafter Sitkoff, Economic Theory]; Jonathan Klick & Robert H. Sitkoff, Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, 108 Colum. L. Rev. 749, 779–783 (2008); Robert H. Sitkoff, An Agency Costs Theory of Trust Law, 89 Cornell L. Rev. 621 (2004); Robert H. Sitkoff, The Economic Structure of Fiduciary Law, 91 B.U. L. Rev. 1041 (2011); Robert H. Sitkoff, Trust Law as Fiduciary Governance Plus Asset Partitioning, in The Worlds of the Trust 428 (Lionel Smith ed., 2013).

(88) See Sitkoff, Economic Theory, supra note 86, at 205 (recognizing “[t]he existence of a mandatory core of fiduciary law”).

(89) See Brooks, supra note 63, at 227 (“Rules regarding the internal order of the relationship may, or may not, be fairly characterized as resulting from bilateral contracting between two rational parties (the internal order appears to be the exclusive domain of the ‘fiduciary as contract’ argument) but when third parties are involved the [principal-agent/fiduciary-beneficiary] dyad’s separate appearance becomes more visible. Nowhere is this more evident than in matters concerning knowledge and information among the parties.”); Richard R. W. Brooks, Loyalty and What Law Requires (2017) (manuscript on file with the author) (arguing that fiduciary law plays a distinctive role in providing and publicizing appropriate conduct rules to agents, trustees and other fiduciaries).

(90) Sitkoff, Economic Theory, supra note 86, at 205 (emphasis in original).

(91) Levmore, supra note 79, at 864 n.1.

(92) Id. at 864.

(93) See Richard R. W. Brooks, Incorporating Race, 106 Colum. L. Rev. 2023 (2006); Oliver Hart, An Economist’s View of Fiduciary Duty, 43 U. Toronto L.J. 299 (1993).

(94) See Brooks, supra note 63, at 311; Michael C. Jensen & William J. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 311 (1976).

(95) That is, it is assumed investments positively affects the value of the contract, but they are noncontractable—which is to say the parties cannot write an enforceable contract that specifies the investment level that i ought to take because investments are unobservable, unverifiable, indescribable or otherwise prohibitively costly to enforce.

(96) Even if the firm’s management does not wish to do so, a shareholder may compel the corporation to engage in some activity consistent with shareholder primacy but inconsistent with the optimum ex ante prescribed behavior of the parties. Fearing the possibility of being held up, employees and suppliers will have reduced incentives to invest, lowering the value of the contracts with the firm: the “holdup problem.” If, however, the firm could credibly commit to not renegotiate, then incentives to invest optimally may be maintained and the holdup problem avoided.

(97) See, e.g., Hart, supra note 92, at 307.

(98) See Brooks, supra note 92, at 2039–2043.

(99) See Jennifer Arlen, Matthew Spitzer & Eric Talley, Endowment Effects Within Corporate Agency Relationships, 31 J. Legal Stud. 1 (2002).

(100) See Jennifer Arlen & Stephan Tontrup, Does the Endowment Effect Justify Legal Intervention? The Debiasing Effect of Institutions, 44 J. Legal Stud. 143 (2015).

(101) See Stephan Tontrup, What Remains of the Endowment Effect When Sellers Trade for Profit? On the Debiasing Effect of Market Institutions (manuscript on file with the author).

(102) See Sven Hoeppner, Russell Korobkin & Alexander Stremitzer, Delegated Promises (manuscript on file with the author).

(103) See Max M. Schanzenbach & Robert H. Sitkoff, The Prudent Investor Rule and Market Risk: An Empirical Analysis, 14 J. Emp. Leg. Stud. 129 (2017).

(104) See Jonathan Macey, An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties, 21 Stetson L. Rev. 23 (1991).

(105) See Henry G. Manne, In Defense of Insider Trading, 44 Harv. Bus. Rev. 113 (1966).

(106) See Alison Grey Anderson, Conflicts of Interest: Efficiency, Fairness and Corporate Structure, 25 UCLA L. Rev. 738 (1978).

(107) See W. Bishop & D. D. Prentice, Some Legal and Economic Aspects of Fiduciary Remuneration, 46 Mod. L. Rev. 289 (1983).

(108) Henry G. Manne, In Defense of Insider Trading, 44 Harv. Bus. Rev. 113 (1966).

(109) Henry G. Manne, Insider Trading and the Law Professors, 23 Vand. L. Rev. 547, 549 (1970).