Edited by Jan M. Smits
Chapter 20: Coordination of legal systems*
Suppose that a seller values his ‘widgets’ at $1 each. A buyer in another jurisdiction is willing to spend as much as $4 for a widget. The different values a buyer and a seller place on the widget make a mutually beneficial agreement possible. Legal rules should ensure that parties who want to perform this agreement are able to do so. After all, such an agreement can leave both parties better off. In this example, the potential gains from the economic activity are maximally $3. When the private law of either jurisdiction creates potential gains of $3 in the aggregate, the private law of both jurisdictions facilitates this economic activity as much as possible. From this angle of perspective, private law that is able to facilitate the said economic activity so as to create potential gains of only $2 in the aggregate does not facilitate economic activity as much as possible. Legal rules, however, do more than simply facilitate economic activity. They also may affect the way contracting parties divide potential gains from economic activity (in this case the difference between $1 and $4) (see, e.g., Baird et al., 1994, p.219; Kaplow and Shavell, 2002, p.156; Cooter and Ulen, 2003, p.260). For example, the appropriateness of an agreed price, as to which the contracting parties have to reach agreement, depends in part on terms respecting transfer of property, liability for breach, remedies for breach and burden of proof.
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