ABSTRACT
Standard economic reasoning suggests that expanding an individual’s choice set cannot reduce welfare because additional options may always be ignored. This intuition underlies the traditional economic justification for freedom of contract. This paper shows that the monotonic relationship between choice and welfare may break down in bargaining environments characterized by asymmetric bilateral monopoly and unequal costs of disagreement. In such settings, some contractual options do not improve the weaker party’s outside alternative but instead expand the set of concessions that the stronger party can credibly demand during negotiation. The paper introduces a distinction between beneficial options, which strengthen a party’s disagreement position, and leverage options, which enlarge the bargaining space without improving the weaker party’s exit opportunities. When leverage options become legally available, the bargaining equilibrium may shift in favor of the stronger party, even if the options themselves are never exercised. The analysis suggests that certain legal limits on contractual autonomy – such as doctrines of public policy, duress, abuse of dependence, and unconscionability – can be understood as institutional commitment devices that remove leverage options from the bargaining space. Rather than imposing paternalistic limits on voluntary exchange, these rules can be understood as providing bargaining safeguards in relationships marked by asymmetric bargaining power. A comparative analysis of legal systems, together with a range of illustrative case studies spanning family, employment, and commercial relationships, shows how legal institutions frequently operate in this manner. The paper thus offers a unified explanation for a wide range of limits on contractual freedom and identifies conditions under which restricting contractual options may improve the welfare of vulnerable parties.
Baffi, Enrico and Parisi, Francesco, The Double Edge of Freedom of Contract (April 4, 2026).
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