Limits of Personalization of Default Rules—Towards a Normative Theory

Some scholars today praise a personalization of the law due to new technological possibilities such as algorithmic analysis of Big Data. When companies personalize their advertisement, why should the legislator refrain from doing the same? Especially default rules seem to be particularly apt for personalization, because they are—at first glance—supposed to mirror what the parties would have wanted. Of course, the law will match better with what the parties would have wanted if it is made to measure for them.

My article, ‘Limits of Personalization of Default Rules—Towards a Normative Theory’ (in a slightly modified version forthcoming in the European Review of Contract Law) aims to unveil the limits of preference-based personalization of default rules. From a normative viewpoint, it objects to personalization on theoretical and constitutional grounds.

Part One: Theoretical Underpinnings

The first part is dedicated to theoretical objections. I challenge the assumption that default rules are only supposed to mirror what the parties would have wanted—a position I call empirical subjectivism—, and I suggest that an explanatory model which I call normative objectivism captures the nature of default rules in a better way. Based on normative objectivism, default rules are perceived as rules of civility and designed according to general values. This approach makes personalization much less attractive.

One can argue in favour of normative objectivism on grounds of classical law and economics considerations. Indeed, in economic terms, the subjectivist demand that default rules should mirror preferences is only a means to the objectivist end of wealth maximization. As soon as it does not serve this end, preference-imitation is abandoned. This insight is illustrated by penalty default rules (pushing default rules): to incentivize parties to opt out and to thereby disclose information, it can be beneficial to depart from mere preference-imitation. In addition, one might refer to what I call the default rule paradox: the formal economic analysis of default rules suggests that they should mirror preferences, because otherwise parties might incur costs to opt out. However, default rules can also be analysed in substantive terms: this analytical approach does not ask what the parties would have wanted, but which contractual default right is efficient according to cost-benefit-analysis. Both approaches might conflict if the contracting parties are irrational. An efficiency-minded legislator might therefore adopt a substantially efficient rule against the parties’ preferences and hope to nudge them in this direction (pulling default rule).

These findings of classical law and economics are reinforced by arguments from behavioural law and economics: preferences are endogenous and subject to diverse biases. Default rules, therefore, influence our preferences, which is why a neutral mirroring of preferences is impossible. Instead, default rules are tools of taste-shaping. Moreover, they have an influence on the bargaining process of the parties and can, therefore, be perceived as property rules with an effect on wealth distribution. These effects also require a normative justification.

Part Two: Constitutional Values

In the second part, I challenge default rule personalization on constitutional grounds with particular focus on the United States and Germany. So far, neither default rules nor personalization have received a detailed analysis based on constitutional principles. My article provides this analysis with regard to freedom and equality.

I show how personalization limits freedom in the private and public sphere: personalizing default rules might lead to an increase in the realization-dimension of freedom, but the so-called choice or agency-dimension of freedom will shrink significantly. Given the lack of individual transparency within a system of personalized law, individuals will defer to whichever default rules they are provided with and abstain from engaging in contractual stipulations. In the public sphere, the same lack of transparency leads to the impossibility of a public discourse as a central element of democracy. In broader terms, the paternalistic tendencies of personalization will trigger a shift from citizen to consumer. Economically, this shift will be accompanied by a shift from capitalism to what I call micro-socialism. Like in socialism, decisions will not be taken by the individual autonomously, but for the individual. But unlike in socialism, decisions will be taken in a decentralized algorithmic way, imitating the multiple micro-decisions of the market. 

With regard to the principle of equality, I analyse how personalization leads to inequality by distinguishing intra-preference-classifications (one single preference, eg of the testator, leads to a different treatment of other individuals, eg the heirs) and inter-preference-classifications (individuals are treated differently because of their different preferences). I then present justification problems of preference-based personalization. These problems are particularly salient in the domain of strict and intermediate scrutiny, ie when the classification is based on objectionable criteria such as race or gender. But even in the realm of the rational basis test, the lack of justification beyond preferences is problematic and leads, in the end, to the abdication of a rational discourse about the content of law. 

Finally, I discuss how personalization would dissolve the essence of the principle of equality altogether and why it is important not only to develop its second prong (treating different cases differently), but to maintain a significant scope of application of its first prong (treating like cases alike). In broader terms, the dissolution of the principle of equality would trigger a societal shift from contract to contact or from association to accumulation, which is no less important than the older shift from status to contract or from community to association. Again, those shifts reflect—in economic terms—the advent of micro-socialism.

Philip M Bender is a Research Associate at the Max Planck Institute for Tax Law and Public Finance, a Lecturer at Ludwig Maximilian University (LMU), and a Visiting Fellow at Information Society Project (ISP) of Yale Law School.