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We study how governments promote social welfare through the design ofcontracting environments. We model the regulation of contracting as defaultdelegation: the government chooses a delegation set of contract terms it iswilling to enforce, and influences the default terms that serve as outsideoptions in parties' negotiations. Our analysis shows that limiting thedelegation set principally mitigates externalities, while default termsprimarily achieve distributional objectives. Applying our model to theregulation of labor contracts, we derive comparative statics on the optimaldefault delegation policy. As equity concerns or externalities increase,in-kind support for workers increases (e.g. through benefits requirements andpublic health insurance). Meanwhile, when worker bargaining power decreasesaway from parity, support for workers increases in cash (e.g. through cashtransfers and minimum wage laws).

Optimal Defaults, Limited Enforcement and the Regulation of Contracts