A contract between parties is a cooperative venture. The
contracting parties seek to exchange something of value from the bargain;
otherwise they would not enter it. There are many theories of contractual
relations (e.g. as noted in 1), which I do not propose to discuss in detail.
What I do want to explore, however, are some of the resource-related conditions
under which parties are likely to enter contracts. Similarly, I wish to explore certain
conditions under which parties are unlikely to enter
contracts, even if the parties are willing and able to enter such contracts and
would choose to do so if the appropriate conditions for doing so existed.
More specifically, I wish to explore the hypothesis that contracts tend
to be formed under conditions of relative personal or business prosperity, and
that as parties' prosperity diminishes, the likelihood that they will enter a
contract also diminishes. Another way to state this is that as parties'
resources become increasingly strained, so diminishes the likelihood that
parties will form contracts.
There is nothing particularly novel about this; indeed it may seem
obvious that parties must have some minimum level of affluence in order to
contemplate entering contracts of any kind. However, from what limited research
I have done, there does not appear to be much literature that identifies the
threshold level of resource scarcity at which parties will choose not to enter
the kind of cooperative bargain that a contract entails. The actual presence of
such a threshold does seem to be implied by the work of Ronald Coase, for
example, some of whose work (2, 3) I will look at here in more detail, and no
doubt many others. Yet the question of how and where that threshold
occurs, if it exists, seems to be rather an open one, and this is the subject
of this present exploration. I aim to
elucidate this problem by what I suggest are simple analogous dynamics: the
dynamics of bicycle pelotons.
Enter peloton theory
Pelotons are groups of cyclists coupled by the energy saving benefits of
drafting. Commonly known among competitive cyclists, drafting occurs when a cyclist
follows sufficiently near another in a region of reduced air pressure; this permits
the following cyclist to ride with reduced power output at the pace set by the
leading cyclist.
A peloton may seem to be an odd source of inspiration for understanding
aspects of contract theory. However, it is not as far-fetched as it may seem. For instance, the strategies of cyclists in
mass-start bicycle races (and who therefore form pelotons) are highly amenable
to game-theory analysis, which involves implied bargains, cooperation and
defection (Mignot, 2016). Any sort of
bargain is contractual in nature due to the parties’ exchange of some consideration
of value.
Such strategies and game theory analysis would thus be an obvious source
of any analogies between contract theory and pelotons. However, I propose
to drill down farther to look beneath the deliberate and conscious strategies that
cyclists might employ, toward basic physical principles that underlie
unconscious self-organizing peloton behaviors.
These “unconscious” behaviors are global, or collective, in the sense
that they emerge holistically among the entire peloton, independently of the
behavior of individual cyclists. In this
respect, collective peloton behavior cannot be directly predicted by analyzing
the behavior of an individual cyclist in isolation.
The basic physical principles that drive collective peloton behavior are
differentials in cyclists’ maximal sustainable outputs, or their fitness or
metabolic capacities, as mediated by the energy saving benefits of drafting. In (5, 6) we describe phases of peloton
behavior that emerge across domains of cyclists' metabolic outputs. Between
these domains, or phases, are certain collective output thresholds that separate
these phases, identifiable by their different descriptions of quantifiable global
behaviors.
In (5, 6) we describe two primary phases by their topologies and
energetic principles: a stretched formation in which the cyclists ride at near
maximal-sustainable outputs (MSO); a compact formation, in which cyclists
collectively ride below their MSOs. We
also describe the compact formation as a convective phase, for reasons I don’t
discuss here. We can quantify the threshold between these phases as
corresponding to the quantity of energy saving generated by drafting (5, 6).
In (7) I proposed an alternative description for these phases, and
introduced the notion of "protocooperative behavior" (which, it
should be noted, is different from "protocooperation"). This
describes the range of self-organizing peloton dynamics that includes the above-noted
primary phases, but described differently as 1), a cooperative phase; and 2) a
predominantly free-riding phase. The cooperative phase is the same as the compact
or convective phase, and occurs at sufficiently low collective power or
metabolic outputs so as to permit cyclists to share time in the highest cost
non-drafting positions; while the free-riding phase is the stretched phase that
emerges at a comparatively high collective metabolic output -- in this phase cyclists
are forced to maximize time in drafting positions when it is physiologically
impossible for cyclists to share time in the highest-cost front position. Of
course, if the collective speed drops, cyclists can then generally resume sharing
time in the front (non-drafting) positions, in which case the cooperative phase
is re-established. As stated, these
dynamics emerge naturally from the coupled metabolic outputs of the cyclists as
facilitated by the power reductions obtained by draftinga,b.
In (7) I proposed certain principles of protocooperative behavior,
including that:
· Protocooperative
behavior emerges in pelotons as a function of differentials in cyclists’
energetic requirements, whose outputs are coupled by the energy saving
mechanism of drafting.
· At comparatively low speeds when cyclists’ capacity to pass others is
abundant, there is a tendency for cyclists to share time spent in the highest cost
non-drafting positions. This tendency diminishes as collective speeds increase
and free-riding (i.e. extended exploitation of the lowest-cost positions)
increases.
· There is
a quantifiable threshold between the cooperative phase and the predominantly
free-riding phase. This “protocooperative threshold” exists as a function of
the quantity of energy saved by drafting, and the difference between the output
of the leading rider and maximum capacities of the following riders. Coupled
cyclists thus approach this threshold when following riders approach their
maximal sustainable outputs at the speed set by the front rider, even when
drafting, since the follower’s ability to pass the front rider by accelerating
is reduced to a near-impossibility. And, as indicated, below this threshold,
cooperative passing behavior and the sharing of costly front positions occurs
more abundantly; and above this threshold, free-riding is generally a
physiological necessity.
Perhaps one of the potentially more controversial,
and counter-intuitive, implications of this theoretical framework is that
cooperation does not emerge in times of high stress, as might be the intuitive
conclusion. Rather, I am suggesting that cooperation tends to emerge when
resources are plentiful. In other words, cooperation is a luxury and when
individuals are strained to their maximum capacities and their available
resources are severely limited, individuals are less likely to cooperate and tend
to act predominantly in their self-interest. This is counter to the intuitive
conclusion that stressful conditions necessitate or precede cooperation to
alleviate the collective stress (at present I don’t have a good citation for
this).
At this point I confess that I cannot cite exhaustive evidence to support the assertion that cooperation is a luxury; for this reason I embark only on an exploration for such evidence, some of which appears to be found among elements of contract theory. All of this a developing work in progress.
Connecting peloton theory and contract theory
So how does peloton protocooperative behavior shed
any light on the hypothesis that parties to a contract will execute their
agreements in conditions of relative prosperity, and that there is an
identifiable threshold between cooperative contracts and free-riding
contractual relations?
First let
us turn to the work of Ronald Coase, and his seminal work, The Nature of the
Firm (1937). Coase earned a Nobel prize
in 1991 for work that originated in his 1937 paper (8).
Coase
describes the function of firms and how they emerge in a free market to reduce “transaction
costs”, or costly inefficiencies in contractual relations. Coase describes it
this way (p. 390):
The main reason why it is
profitable to establish a firm would seem to be that there is a cost of using
the price mechanism. The most obvious
cost of “organising” production through the price mechanism is that of
discovering what the relevant prices are.
This cost may be reduced but it will not be eliminated by the emergence
of specialists who will sell this information.
The costs of negotiating and concluding a separate contract for each
exchange transaction which takes place on a market must also be taken into
account. Again, in certain markets, e.g. produce exchanges, a technique is
devised for minimising these contract costs; but they are not eliminated. It is true that contracts are not eliminated
when there is a firm but they are greatly reduced. A factor of production (or
the owner thereof) does not have to make a series of contracts with the factors
with whom he is co-operating within his firm, as would be necessary, of course,
if this co-operation were as a direct result of the working of the price
mechanism. For this series of contracts is substituted one.
In view
of Coase’s description of the emergence of the firm as a means of reducing
inefficient transaction costs, I suggest, albeit perhaps over-simplistically, that
the emergence of a firm is analogous to the cooperative phase of peloton
dynamics at comparatively low collective output. In this view, a firm emerges when there is
some comparative abundance of resources and energy available to the managers
and employees who comprise the firm. The firm thus precedes and/or prevents the
incremental increase in transaction costs required for a series of individual
contracts, which costs potentially increase until contracting parties reach the
limits of their financial or operational resources.
Thus, on
one hand, it seems fair to say that that the firm emerges not as a response to
high transaction costs, but prior to the point at which parties incur such
costs. On the other hand, it is also perhaps fair to say that the emergence of
the firm is indeed a rational and expected response to the high transaction
costs of a series of costly individual contracts. If it is the latter, then the
firm represents the collapse, if you will, of the high-output free-riding phase
that occurs in times of high-transaction cost contracts. Under both these perspectives,
the peloton analogy is sustainable, but perhaps it is not entirely consistent
with a strict view that cooperation emerges only in times of luxury. Perhaps we
are left with a kind of chicken-or-egg scenario that is impossible to resolve.
Oscillating contractual
conditions
At this
juncture, it is premature, based on this limited exploration, to conclude with
any degree of certainty that efficient contractual conditions, such as the
emergence of firms, arise in times of relative luxury. However, we appear to be
left with a viable analogue of oscillating contractual conditions: high
transaction cost relationships are like the stretched phase of peloton behavior
in which resources are strained to their maximum availability; the emergence of
firms is like the lower-cost cooperative (or compact, or convective) phase of
peloton dynamics. In a given economy, we may imagine that these conditions will
oscillate over time, very much as the sorts of oscillating phase dynamics we
observe in pelotons.
At this
point, I suggest that the peloton analogy goes farther than merely illustrating
a point about oscillating contractual relationships in a broad economic context. Rather, I suggest that the analogy describes a
real theoretical framework for investigating the presence of quantifiable
energetic-related thresholds of contractual relations. Obviously, a lot more work needs to be done
to develop this, however.
With this
limited and simplistic foray into some new explorations, I will leave off. In a further installment, I’ll look at Coase’s
discourse on “The Problem of Social Cost”, and how contracts for compensation and
litigation damages tend to equalize differentials in parties’ economic
positions. I argue that equalization of these differentials is rather like the
effect of the energy saving mechanism of drafting in pelotons, by which cyclists
equalize their output differentials. I’ll also consider standard form
contracts, otherwise known as adhesion contracts, how they tend to reduce
transaction costs and promote free-riding (Waddams et al., 2000) and identify analogous
peloton behaviors.
___________________________
a As noted, here I am not
concerned with dynamics that result from cyclists' deliberate strategies. Some
might argue that it is impossible to separate cyclists' conscious strategies
from the collective dynamics of the peloton. However, the fact that we can
simulate basic collective behavior of pelotons and their phase dynamics, as we
have done in (6) based on a few basic parameters and without introducing
volitional strategies, strongly suggests that certain basic peloton dynamics
self-organize independently of these volitional strategies.
b Some might point to a third phase that
emerges at very low metabolic outputs, when free riding is also abundant
because riders do not tend to share costly front positions. To the extent such
a phase exists, it is distinguishable from high-output free-riding that occurs
by physiological necessity. In this high-output phase, cyclists are physically
unable to share the front position and must free ride to sustain the pace set
by the front rider. In the low-output phase, cyclists have a choice to share
the front position and, should they do so, a general increase in speed is
observed as cyclists attempt to shift positions within the peloton to achieve
front positions or other non-drafting positions, such as while moving up along
perimeters -- hence generating the compact, or cooperative phase.
References
1. Waddams, S.W., Trebilcock, M.J., Waldron, M.A. 2000. Cases
and Materials on Contracts. Ch 1. Perspectives on Contract Law.
Edmond Montgomery Publications Limited, Toronto, Canada.
2. Coase, R.H., 1960. The problem of social cost. The
Journal of Law and Economics, (3), 1-44.
3. Coase, R.H., 1937. The nature of the firm. Economica, New
series, 4(16), 386-485.
4. Mignot, J.F., 2016. Strategic Behavior in Road Cycling Competitions.
In The Economics of Professional Road Cycling (pp. 207-231).
Springer International Publishing.
5. Trenchard, H., Richardson, A., Ratamero, E. and Perc, M., 2014.
Collective behavior and the identification of phases in bicycle pelotons. Physica
A: Statistical Mechanics and its Applications, 405, pp.92-103.
6. Trenchard, H., Ratamero, E., Richardson, A. and Perc, M., 2015. A
deceleration model for bicycle peloton dynamics and group sorting. Applied
Mathematics and Computation, 251, 24-34.
7. Trenchard, H. The peloton superorganism and protocooperative
behavior. Applied Mathematics and Computation 270 (2015):
179-192.
8. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1991/coase-lecture.html
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