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Thursday, December 2, 2004

An empirical look at Hadley v. Baxendale

Gloucester_mills One hundred and fifty years later, the consequences of the broken mill shaft at the City Flour Mills (left) are still being studied.  Now, a new paper on SSRN from George Geis (Alabama), Empirically Assessing Hadley v. Baxendale.

Geis, a former management consultant who obviously is familiar with the marketing science literature, notes the theoretical battle over whether Hadley’s foreseeability rule makes economic sense or not.  He then goes on to try to determine emprically  whether it does.  He uses the "willingness-to-pay" approach common in marketing schools to evaluate the rule under three different scenarios.

Conclusion? Hadley’s rule ultimately seems superior to the alternative full-damages approach—but that may not be true in many situations and further study is needed. Prediction: There will be further study.  For the abstract, click the link below.

ABSTRACT

The rule of Hadley v. Baxendale enjoys an important place in the economic analysis of contract law. Over time, Hadley has taken on great significance as an archetype for contract default rules that efficiently expose asymmetric information. But a hotly contested debate questions whether economic theories of Hadley—and economic approaches to contract law more generally—have failed. There are two concerns. First, it may be hard to empirically measure key variables in the economic models. Second, the models are complex, making it difficult to sum the effects of multiple variables. This Article takes up the challenge of empirically assessing the Hadley rule with a new approach that draws upon willingness-to-pay studies in the field of marketing. The first of its kind, this work presents evidence that the Hadley rule is a preferable legal default in three simple markets—subject to several important qualifications. This study implies that markets with similar conditions might also benefit from a Hadley default rule. More broadly, it suggests that marketing research may be a rich source of data for testing economic theories of contract law.

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