The author thanks Richard Bronaugh, Bruce Chapman, Alon Harel, Heidi Libesman, Eric Orts and participants in the 2006 annual meeting of the European Association for Law and Economics for their comments, and Brian Studniberg and Charlene Jones for research assistance.

1. Sen, Amartya, “Rational Fools” (1977) 6 Phil. & Pub. Affairs 317 Google Scholar [Sen, “Rational Fools”].

2. See Becker, Gary, “The Economic Way of Looking at Life” (Prize lecture for the The Sveriges Riksbank Prize in Economic Sciences in Memory of Nobel, Alfred, 9 December 1992) in Persson, Torsten, ed., Nobel Lectures, Economic Sciences 1991-1995 (Singapore: World Scientific Publishing Co., 1997) 38 Google Scholar [Becker, “Economic Way”]; Posner, Richard, “Rational Choice, Behavioral Economics, and the Law” (1998) 50 Stan. L. Rev. 1551 [Posner]CrossRefGoogle Scholar; Kaplow, Louis & Shavell, Steven, “Fairness Versus Welfare” (2001) 114 Harv. L. Rev. 961 [Kaplow & Shavell]CrossRefGoogle Scholar.

3. See, e.g., Brennan, Timothy, “A Methodological Assessment of Multiple Utility Frameworks” (1989) 5 Econ. & Phil. 189 [Brennan]CrossRefGoogle Scholar; Pettit, Philip, “Construing Sen on Commitment” (2005) 21 Econ. & Phil. 15 [Pettit].CrossRefGoogle Scholar

4. Sen, “Rational Fools”, supra note 1 at 317 (quoting Edgeworth, F.Y., Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences (London, 1881) at 16)Google Scholar.

5. Ibid. at 318-23.

6. Stigler, George, “Economics or Ethics?” (1981) 2 The Tanner Lectures on Human Values 143, online: Tanner Lectures http://www.tannerlectures.utah.edu/lectures/stigler81.pdf.Google Scholar

7. See, e.g., Friedman, Milton, “The Methodology of Positive Economics” in Essays in Positive Economics (Chicago, IL: University of Chicago Press, 1953) 3.Google Scholar

8. Buchanan, James & Tullock, Gordon, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor: University of Michigan Press, 1965) at 3–4 [Buchanan & Tullock]Google Scholar.

9. Arrow, Kenneth, “Gifts and Exchanges” (1972) 1 Phil. & Pub. Affairs 343 at 348Google Scholar. Arrow nevertheless warned against overusing non-egoistic behavioural hypotheses, which he thought had limited application (354-55).

10. Becker, “Economic Way,” supra note 2.

11. Sen, “Rational Fools,” supra note 1 at 322.

12. See, e.g., Buchanan and Tullock, supra note 8; Becker, Gary, The Economic Approach to Human Behaviour (Chicago, IL: University of Chicago Press, 1976)Google Scholar; Becker, Gary, A Treatise on the Family (Cambridge, MA: Harvard University Press, 1981)Google Scholar; Becker, Gary, Accounting for Tastes (Cambridge, MA: Harvard University Press, 1996)Google Scholar [Becker, Accounting for Tastes].

13. Posner, supra note 2 at 1554.

14. Trebilcock, Michael, The Limits of Freedom of Contract (Cambridge, MA: Harvard University Press, 1993) at 7 Google ScholarPubMed [Trebilcock].

15. Ibid. Trebilcock adds that “the presumption is rebuttable by reference to a fairly conventional list of forms of market failure or... contracting failure,” such as transaction costs or externalities (Trebilcock, ibid. at 7).

16. Sen, “Rational Fools,” supra note 1 at 326.

17. Ibid. at 327.

18. Ibid. at 326, 328-29.

19. Ibid. at 338.

20. Ibid. at 339.

21. Ibid. at 333.

22. Ibid. at 333-34.

23. Sen, Amartya, “Why Is Commitment Important for Rationality?” (2005) 21 Econ. & Phil. 5 at 8-10CrossRefGoogle Scholar [Sen, “Commitment”].

24. Sen, “Rational Fools,” supra note 1 at 342-43.

25. Sen, “Commitment,” supra note 23 at 8.

26. See, e.g., Pettit, supra note 3; Schmid, Hans-Bernard, “Beyond Self-Goal Choice: Amartya Sen’s Analysis of the Structure of Commitment and the Role of Shared Desires” (2005) 21 Econ. & Phil. 51.CrossRefGoogle Scholar

27. See, e.g., Sen, Amartya, “Goals, Commitment and Identity” (1985) 1 Journal of Law, Economics & Organization 341 Google Scholar; Sen, “Commitment,” supra note 23.

28. Sen, “Rational Fools,” supra note 5 at 329.

29. While this aspect of Sen’s concept of commitment has received less attention, it has not gone unnoticed. See, e.g., Brennan, supra note 3; Pettit, supra note 3; Hausman, Daniel & Macpherson, M.S., Economic Analysis and Moral Philosophy (Cambridge: Cambridge University Press, 1996)Google Scholar; Mongin, Philippe, “A Concept of Progress for Normative Economics” (2006) 22 Econ. & Phil. 19 CrossRefGoogle Scholar.

30. Sen, “Rational Fools,” supra note 1 at 323-24.

31. Ibid. at 339-40.

32. Ibid. at 339.

33. See March, J.G. & Simon, H.A., Organizations (New York: Wiley, 1958)Google Scholar; Williamson, Oliver, “The Economics of Organizations: The Transaction Cost Approach” (1981) 87: 3 Am. J. Sociology 548 CrossRefGoogle Scholar [Williamson].

34. Kaplow & Shavell, supra note 2 at 1330. See also Sunstein, Cass, “Legal Interference with Private Preferences” (1986) 53 U. Chi. L. Rev. 1129 at 1166-67CrossRefGoogle Scholar [Sunstein].

35. For a similar interpretation of bounded rationality, see Jensen, Michael C. & Meckling, W.H., “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (1976) 3 Journal of Financial Economics 305 at n. 3 [Jensen & Meckling]CrossRefGoogle Scholar.

36. Kaplow & Shavell, supra note 2 at 1334; Sunstein, supra note 34 at 1158.

37. See Becker, Accounting for Tastes, supra note 12.

38. Moreover, the constraints are themselves the outcome of the person’s previous choices, for example, in Ulysses’ case, the choice not to have someone double-check the strength of the bonds fastening him to the mast. Presumably in forgoing this added precaution Ulysses was revealing his preferences, as well.

39. Let U(x) be Fred’s welfare at T+1 from choosing action x. That Fred anticipates he will give in to his craving means that U(x) is maximized over {snack, not snack} when x = snack. This implies that U(not snack) < U(snack). If Fred locks the refrigerator at time T, his choice set at T+1 will be {not snack}, and his welfare at T+1 will be U(not snack) < U(snack). If Fred locks the refrigerator at T, he will reduce his welfare at time T+1.

40. The concept of time-inconsistent preferences seems to reflect this interpretation ( Elster, Jon, Ulysses and the Sirens: Studies in Rationality and Irrationality (Cambridge: Cambridge University Press, 1979) 69 Google Scholar-70). Elster models the individual as possessing a single utility function u over allocations of consumption x1, x2, and x3 (representing consumption at three time periods) subject to the constraint that x1+x2+x3 is constant. If we let (χ1, χ2, χ3) represent the allocation that maximizes u(x1, x2, x3), then an individual’s utility function is time-inconsistent if (χ1, χ2, χ 3) is different from the allocation that maximizes u(x1, x2, x3) |x1 = χ1. The model assumes, of course, that individuals’ choices at each moment maximize their “utility” (i.e., welfare) subject to the then-prevailing constraints. Hands-tying strategies undertaken at the initial period are intended to cause the individual to choose (χ 1, χ2, χ3) during the second period even if this is not the allocation that maximizes u(x1, x2, x3) | x1 = χ1—in other words, even if it is not the allocation that, under the constraints prevailing in the second period maximizes the individual’s utility. See also Elster, Jon, Ulysses Unbound (Cambridge: Cambridge University Press, 2000) 24 CrossRefGoogle Scholar; Cukierman, A., Central Bank Strategy, Credibility and Independence (Cambridge, MA: MIT Press, 1992)Google Scholar. Quoting Cukierman, Elster describes time-inconsistency as occurring when, without any change in exogenous circumstances, “the best policy currently planned for some future period is no longer the best when that period arrives.” Accordingly, hands-tying is an act that I undertake today so as to ensure that in the future period I will choose the policy that maximizes my welfare (the “best policy”) as I see it today, although I anticipate that it is not the policy that will maximize my welfare as I will then perceive it.

41. We cannot (A) take the position that Fred’s welfare at T+1 is improved by eliminating the option that he would have chosen, all things considered at time T+1, while (B) defining welfare as that which is maximized by one’s choices, all things considered. (A) implies that U(not snack) > U(snack), whereas (B), combined with what we know Fred would do if the refrigerator were not locked implies that U(snack) > U(not snack).

42. Dowding, Keith, A Defence of Revealed Preference Analysis (2002) at 18 [unpublished, available at http://personal.lse.ac.uk/DOWDING/Files/Dowding_Defence_of_RP_04_02.pdf]Google Scholar.

43. It has also been argued that revealed preference is indispensable for empirical social science research (see Dowding, ibid). However, one can acknowledge the utility of revealed preference for conducting empirical research, and still question whether for the purposes of normative economics welfare and choice must be treated as synonymous.

44. See, e.g., Abley, J., “Stated Preference Techniques and Consumer Decision Making: New Challenges to Old Assumptions” (2005) [unpublished, archived at Cranfield University online: https://aerade.cranfield.ac.uk/bitstream/1826/664/2/SWP0200.pdf Google Scholar (“Whilst the techniques grew in their usage, economists remained sceptical about the reliance upon respondents’ ‘stated intentions,’ rather than actual behaviour” at 9); Hensher, D., Barnard, P. & Truong, P., “The Role of SP Methods in Studies of Travel Choice” (1988) 22 Journal of Transport Economics and Policy 45 at 55Google Scholar; Hensher, D., “Stated preference analysis of travel choices: the state of practice” (1994) 21 Transportation 107 at 107-08CrossRefGoogle Scholar, n. 1 (discussing economists’ disparagement of stated preference data); Carson, R.T. & Groves, T., “Incentive and Informational Properties of Preference Questions” (2007) 37 Environmental and Resource Economics 181 at 182, n. 4CrossRefGoogle Scholar (discussion of possibility of strategic misrepresentation of preferences on surveys).

45. See Anonymous, “Note, The Theoretical Foundation of the Hearsay Rules” (1980) 93 Harv. L. Rev. 1786 CrossRefGoogle Scholar.

46. In Canada, see R. v. Khan [1990] 2 S.C.R. 531; R. v. Smith [1992] 2 S.C.R. 915. In the U.K., see Criminal Justice Act 2003, s. 114(1)(d), (2).

47. Sen, Amartya, “Behaviour and the Concept of Preference” (1973) 40 Economica 241 at 257-58CrossRefGoogle Scholar.

48. In this paper, “corporation” refers to a business corporation organized in the U.S. or Canada. In addition, readers should not think that the term “legal provisions” refers only to the provisions of the corporations statute. I intend the term broadly, so as to include as well the terms of the instruments adopted by the participants in the corporation against the backdrop of corporate law. Examples of such terms are the provisions of the articles of incorporation and of any issued securities, and the terms under which other voluntary participants, such as employees, become associated within the corporation. In this sense, my perspective on the corporation is, as I explain below, contactarian.

49. Coase, Ronald, “The Nature of the Firm” (1937) 4 Economica 386 [Coase]CrossRefGoogle Scholar; Alchian, Armen A. & Demsetz, Harold, “Production, Information Costs, and Economic Organization” (1972) 62 Am. Econ. Rev. 777 [Alchian & Demsetz]Google Scholar; Jensen & Meckling, supra note 35.

50. Ibid.

51. See, e.g., Alchian & Demsetz, supra note 49; Jensen & Meckling, supra note 35.

52. Coase, supra note 49 at 395.

53. See Williamson, supra note 33.

54. See Blair, Margaret & Stout, Lynn, “A Team Production Theory of Corporate Law” (1999) 85 Va. L. Rev. 247 [Blair & Stout, “Team Production”]CrossRefGoogle Scholar; Blair, Margaret & Stout, Lynn, “Director Accountability and the Mediating Role of the Corporate Board” (2001) 79 Wash. U. L. Q. 403 Google Scholar.

55. Some may think “chaos” an excessively colourful term in the context of the corporation. In fact, Coase was concerned about “transaction costs,” specifically the costs of pricing transactions in the marketplace. But both Williamson and Blair and Stout describe the alternative to fiat in less abstract and anodyne terms than Coase: Williamson describes fiat as necessary in a world where contracting parties do not merely pursue their own interest, but are ready to deceive and cheat in their dealings with others, whereas Blair and Stout portray the alternative to the firm as a situation where contributors of firm-specific resources are mired in disputes about the distribution of the rents produced by the firm. These disorderly dealings—a mild form of chaos-are what fiat is supposed to avert.

56. See Alchian & Demsetz, supra note 49; Jensen & Meckling, supra note 35.

57. Alchian & Demsetz, supra note 49 at 777.

58. Jensen & Meckling, supra note 35 at 311.

59. The market for corporate control refers to the protection of the shareholders’ interests afforded by the fact that managers’ desire to keep their jobs leads them to abstain from activities (such as shirking and self-dealing) that will depress the stock price and make the corporation a potential hostile takeover target. The utility of the market for corporate control as a bonding device is, accordingly, an explanation for those features of the corporation that make that market possible, namely the free transferability of shares and the right of the majority shareholders to replace the directors. See Manne, Henry G., “Mergers and the Market for Corporate Control” (1965) 73 J. Pol. Economy 110 [Manne, “Mergers”]CrossRefGoogle Scholar.

60. See Easterbrook, Frank & Fischel, Daniel, The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press, 1991) at 6 Google Scholar [Easterbrook & Fischel]. When I say that this methodological choice is questionable, I do not dispute, of course, the practice of making simplifying assumptions as a necessary part of the exercise of modeling behaviour and generating testable predictive hypotheses. What I question is the advisability of interpreting a legal act as if it had been adopted by the simplified actors of the economic model, instead of by real people.

61. Manne, “Mergers,” supra note 59. Some might dispute the characterization of Manne’s article as “legal” scholarship, since it appeared in the Journal of Political Economy rather than a law review. It is beyond dispute, however, that Manne’s article has had enormous influence in the legal academy. According to one study of citations in law journals, it was the most-cited article of all time: see Carney, William J., “The Legacy of ‘The Market for Corporate Control’ and the Origins of the Theory of the Firm” (1999) 50 Case W. Res. L. Rev. 215 at 225Google Scholar.

62. Manne, “Mergers,” supra note 59 at 113.

63. See Cary, William L., “Federalism and Corporate Law: Reflections Upon Delaware” (1974) 83 Yale L.J. 663 CrossRefGoogle Scholar; Winter, Ralph K., “State Law, Shareholder Protection, and the Theory of the Corporation” (1977) 6 J. Legal Stud. 251 [Winter]CrossRefGoogle Scholar; Romano, Roberta, “Law as a Product: Some Pieces of the Incorporation Puzzle” (1985) 1 L.J. Econ. & Org. 225 [Romano]Google Scholar.

64. See Winter and Romano, ibid. For a well-argued dissenting view, see Bebchuk, Lucian A. & Ferrell, Allen, “Federalism and Corporate Law: The Race to Protect Managers from Takeovers” (1999) 99 Colum. L. Rev. 1168 CrossRefGoogle Scholar.

65. Posner, Richard A., Economic Analysis of the Law, 3d ed. (Boston: Little Brown, 1986) at 394–97 Google Scholar.

66. See also Manne, Henry G., “The Limits and Rationale of Corporate Altruism: An Individualistic Model” (1973) 59 Va. L. Rev. 708 CrossRefGoogle Scholar.

67. Blair & Stout, “Team Production,” supra note 54 at 284.

68. See Manne, Henry G., “A Free Market Model of a Large Corporation System” (2003) 52 Emory L.J. 1381 Google Scholar.

69. Ibid. at 1391.

70. For instance, a conventional economic model of the firm enables us to predict that the more friction exists in markets for factors of production in a given economic sector, the greater the extent to which we can expect that firms in that sector will be vertically integrated (Coase, supra note 49).

71. Bainbridge, Stephen, “Director Primacy: Means and Ends of Corporate Governance” (2003) 97 Nw. U. L. Rev. 547 at 555-57Google Scholar [Bainbridge, “Director Primacy”].

72. I recognize that, in practice, the quality of the deliberations may be wanting. In some circumstances, chief executive officers may wield overwhelming influence over boards; in others, directors may fail to exercise diligence and independent judgment in carrying out their duties. I regard these situations as pathological, rather than as definitive of directors’ role within corporate governance.

73. See, e.g., Bainbridge, Stephen, “Why a Board? Group Decisionmaking in Corporate Governance” (2002) 55 Vand. L. Rev. 1. Google Scholar Bainbridge discusses the advantages multi-person boards offer as a solution to the problem of “who will watch the watchers,” and offers an additional explanation for the multi-person board. Given bounded rationality, and on the basis of experimental literature suggesting that groups are more competent decision-makers than their average member, Bainbridge suggests that the use of group decision-making may be a rational adaptation to individual cognitive limitations. His argument recalls the saying, “two heads are better than one.”

74. Easterbrook & Fischel, supra note 60 at 92.

75. Bainbridge, “Director Primacy,” supra note 71 at 581.

76. See Dodge v. Ford Motor Co., 170 N.W. 668 at 684 (Mich. Sup. Ct. 1919).

77. See Lee, Ian, “Is There a Cure for Corporate ‘Psychopathy’?” (2005) 42 Am. Bus. L.J. 65 CrossRefGoogle Scholar. In 1992, the Delaware chancellor described the legal position as “schizophrenic” (See Allen, William T., “Our Schizophrenic Conception of the Corporation” (1992) 14 Cardozo L. Rev. 261)Google Scholar.

78. See, for example, Medical Committee for Human Rights v. Securities and Exchange Commission, 432 F.2d 659 at 662 (D.C. Cir. 1970). In this case, although admittedly not a state corporate law decision, the D.C. Circuit Court of Appeals recognized the legitimacy of the shareholders’ concerning themselves with the responsible conduct of the corporation’s business, even if profits were thereby not maximized.

79. See, e.g., Paramount Communications, Inc. v. QVC Network Inc., 637 A2d 34 (Del. 1994) (where a change of control or sale of the business has become inevitable, the directors must be guided exclusively by the goal of maximizing the value received by the shareholders). In many states, the board’s mandate remains broad even in the situation of a takeover, in light of so-called “constituency statutes.”

80. See, e.g., Bainbridge, Stephen M., “The Case for Limited Shareholder Voting Rights” (2006) 53 UCLA L. Rev. 601 at 613Google Scholar [Bainbridge, “Limited Shareholder Voting Rights”].

81. Bainbridge, “Director Primacy,” supra note 71.

82. The shareholders’ power is ultimate since, as even Easterbrook and Fischel acknowledge, “managers exercise authority at the sufferance of investors” (Easterbrook & Fischel, supra note 62 at 67).

83. Bainbridge, “Limited Shareholder Voting Rights,” supra note 80 at 613-14.

84. See Del. G.C.L. §§ 211(a), 219(a), 222; C.B.C.A. ss. 132(5), 138.

85. See TSC Industries Inc. v. Northway Inc. 426 U.S. 438 at 449, 96 S.Ct. 2126 (U.S.S.C. 1976): in Canada, see Canada v. Royal Trustco Ltd. (1984), 6 D.L.R. (4th) 682 (O.C.A.), aff ‘d [1986] 2 S.C.R. 537.

86. A two-stage approach is common in contactarian analyses of the corporation. It is, for instance, employed by: Coase, supra note 49; Williamson, supra note 33; Easterbrook & Fischel, supra note 60; and Blair & Stout, “Team Production,” supra note 54.

87. See Rawls, John, A Theory of Justice (Cambridge, MA: Belknap Press, 1971).Google Scholar

88. The necessity for universal consent obliges participants to adopt an impartial perspective in practice, without the need for the device of the veil of ignorance.

89. Alchian & Demsetz, supra note 49.

90. Coase, supra note 49. Bainbridge, “Director Primacy,” supra note 71.

91. Blair & Stout, “Team Production,” supra note 54.

92. Sen, “Rational Fools,” supra note 1 at 344.

93. Anderson, Elizabeth, “Unstrapping the straitjacket of ‘preference’: a comment on Amartya Sen’s contributions to philosophy and economics” (2001) 17 Econ. & Phil. 21 CrossRefGoogle Scholar [Anderson].

94. Ibid. at 28.

95. Ibid. at 30.

96. Ibid. at 31.

97. The shareholders’ meeting is a similar mechanism. In the case of the shareholders, the fact that the shareholders act by meeting, and the provisions governing the meeting, are suggestive of the deliberative character of the shareholders’ power (see text accompanying notes 78-80). Unlike the board the shareholders are in most cases not under an explicit legal obligation to exercise their voting rights with a view to the best interests of the corporation; this is no less true of voters in elections for public office.

98. This is a distinction for convenience of presentation; I acknowledge that it is also possible to understand moral commitment as the limiting case of collective identification, that is, as action on the basis of principles which “it would be rational for a collective encompassing all of humanity to adopt” (Anderson, supra note 93 at 24).

99. Sen, “Rational Fools,” supra note 1 at 329 (quoting G.B. Shaw, The Devils Disciple).

100. See Ribstein, Larry, “Accountability and Responsibility in Corporate Governance” (2006) 81 Notre Dame L. Rev. 1431 Google Scholar [Ribstein].

101. See especially Butler, Henry N. & McChesney, Fred S. “Why They Give at the Office: Shareholder Welfare and Corporate Philanthropy in the Contractual Theory of the Corporation” (1999) 84 Cornell L. Rev. 1195 Google Scholar; see also Elhauge, Einer, “Sacrificing Corporate Profits in the Public Interest” (2005) 80 N.Y.U. L. Rev. 733 Google Scholar; Ribstein, ibid.

102. Compare American Law Institute, Principles of Corporate Governance (St. Paul, MN: The Institute, 1994)Google ScholarPubMed §2.01 (“the corporation may make decisions based on ethical considerations regardless of their effect on long run profits.”).

103. In reaching this conclusion, I have not discussed certain familiar arguments against collective decision-making based on social choice theory, such as those derived from Arrow’s theorem on the impossibility of a voting rule meeting certain minimalist requirements of fairness and coherence. As Dryzek and List, among others, have argued deliberation may create conditions in which one or more assumptions underlying Arrow’s impossibility result do not apply, and the impossibility result is avoided. I do not wish to rehearse their arguments here, or otherwise engage in the debate about the implications of deliberation for social choice theory. Indeed, my focus is not particularly on voting. I am concerned instead with the implications for corporate theory of Sen’s insight that if we distinguish between welfare and choice, we may find it useful to have means of obtaining information about individuals’ welfare in addition to the observation of their revealed preferences. See Arrow, Kenneth, Social Choice and Individual Values, 2nd ed. (New York: Wiley, 1963)Google Scholar; Dryzek, John S. & List, Christian, “Social Choice Theory and Deliberative Democracy: A Reconciliation” (2003) 33 British J. Pol. Science 1 CrossRefGoogle Scholar.

104. Romano, supra note 63.

105. See Part II.1, above.