The Economics of Relationships and the Limits of the Law

In this study we model "close-knit" human relations in order to explain the empirical findings of social scientists that law does not affect behaviors occurring within such relationships. We show that parties face significant strategic obstacles in forming relationships, and suggest how they can overcome those obstacles. Once an efficient relationship forms, however, our model confronts the standard finding that relational equilibria are too numerous to permit the drawing of very precise conclusions about behaviors that can be expected to occur within close relationships. To meet that difficulty, we propose that a large class of strategic relational equilibria which we denote as "unilaterally inefficient" are implausible and suggest that parties can be expected to follow relational strategies which do not produce them. Those strategies we define as "value-oriented." By restricting our attention to equilibria produced by relational interactions using value oriented strategies, we show that in on-going relationships, exogenous legal entitlements will never be resorted to unless the relationship is no longer efficient, in which case exogenous law ought to terminate it. We discuss several legal fields in which legal relationships might likely resemble the economic relationships we model, and show that the structure of traditional legal doctrine is consistent with the predictions generated by our model. The law does not attempt to intervene in ongoing relationships except to terminate them. Our analysis also shows, however, that the absence of legal entitlements is roughly coextensive with environments in which self-help is most likely to be an effective substitute for overcoming whatever collective action problem legal doctrine might have otherwise been called upon to address.