Optimal Default Rule for Breach of Contract
In this study, we follow Ayres and Gertner and focus on private contracts between a buyer and a seller in a model based on the well-known case of Hadley v. Baxendale. Then, we examine the problem of whether the normal-damage (the seller is liable for the buyer’s normal loss in case provision fails, also known as the Hadley rule) or full-damage (the seller is liable for the full loss, whatever it is) rule is more effective in settling contract violations. The results of the analysis show that the full-damage rule has a better information disclosure effect than the normal-damage rule, unlike in previous studies, indicating that the full-damage rule may be desirable.
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