Wednesday, February 24 at 12:00pm to 1:00pmVirtual Event
Assistant Professor of Law, UC Berkeley Law
Law and economics of consumer financial contracts
Professor Padi will be presenting her paper, “Contractual Inequality”.
Policy debates about economic inequality have overlooked an important driver of inequality – contracts. Ordinary individuals and small businesses struggle to meet their numerous contractual obligations, barely making rent and student loan payments while performing on taxing employment contracts. In contrast, wealthy individuals and corporations regularly cast off onerous contractual obligations or avail themselves of legal tools to renegotiate or modify terms according to their needs. Drawing on a nationwide dataset of residential mortgage contracts, this Article provides quantitative evidence that the same formal contracts give rise to very different outcomes for different types of parties. For instance, more than a third of mortgage lenders never foreclose on properties even when borrowers have stopped making payments. These discretionary benefits accrue to rich borrowers at the expense of the poor, with rich neighborhoods gaining $420 million in wealth per year more than poor neighborhoods from lender leniency. Disparities of this type not only raise equitable concerns but also threaten the economic efficiency of contracts through moral hazard. Since inequality is enabled but not remedied by contract law, this Article argues that inequality generated by contracts must be addressed by regulators overseeing contract performance.
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