High-End Bargaining Problems

This Article presents a novel challenge to one of the central principles of the law and economics literature. Traditional law and economics theory places great confidence in the ability of contracting parties to bargain for optimal contracts, and the law reflects this confidence in many important ways. In this Article, I question the wisdom of a formalistic faith in bargaining by uncovering significant flaws in the bargaining process at the high end of the market, where parties are sophisticated and have substantial resources to aid them in bargaining.My analysis focuses on the private equity fund industry, which is widely regarded as one of the most elite and sophisticated contracting spaces in the market. There are few industries where parties are better-positioned to bargain for optimal outcomes, but a careful review reveals many problems. Drawing on proprietary survey data and dozens of conversations with industry participants, this Article offers an in-depth analysis of problematic bargaining practices in private equity funds.These bargaining problems raise a difficult question for scholars and policymakers: If theory does not reflect reality in the high end of the market, what can be expected in other areas where parties are less sophisticated and have fewer resources? These findings call for greater skepticism of formalist assumptions about bargaining across the market more broadly, with important implications for contract law, the law of business organizations, and securities law