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The Questionable Ascent of Hadley v. Baxendale

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  • Adler, Barry E.
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    Abstract

    The venerable case of Hadley v. Baxendale serves as the prototype for default rules designed to penalize, and thus encourage disclosure by, an undesirable contractual counterpart. Penalty-default analysis is now widely accepted as a plausible approach to the issues presented by incomplete contracts. The ambition of this article is to challenge and refine the accepted wisdom. The article demonstrates that the structure of penalty-default theory as derived from Hadley rests on a faulty implicit premise. The premise is that damages from breach of contract are certain. In fact, damages are stochastic. Consequently, the standard penalty-default model of Hadley overlooks the potential incentive of a party to conceal information even though the party is subject to a penalty-default rule. This incentive, which is shown to exist in other contexts, may greatly complicate the evaluation of a default rule’s efficacy. Thus, a lawmaker may have reason to be skeptical of her ability to identify an efficient penalty-default rule, the seeming simplicity of Hadley notwithstanding.

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    Bibliographic Info

    Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt3wh5v8j9.

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    Date of creation: 01 Jul 1999
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    Handle: RePEc:cdl:oplwec:qt3wh5v8j9

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    Cited by:
    1. Liu, Zhiyong & Avraham, Ronen, 2012. "Ex ante versus ex post expectation damages," International Review of Law and Economics, Elsevier, vol. 32(4), pages 339-355.
    2. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2009. "Should Courts Always Enforce What Contracting Parties Write?," PIER Working Paper Archive 09-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. De Geest, Gerrit, 2013. "N problems require N instruments," International Review of Law and Economics, Elsevier, vol. 35(C), pages 42-57.
    4. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.

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