N Problems Require N Instruments

Abstract:     
Eric Posner (2003) has argued that (contract) law and economics has failed to produce clear policy recommendations because its theoretical results are usually inconclusive and empirical data on the parameters are usually unavailable. Legislators and courts, however, cannot wait to make decisions until scholarship is conclusive; hence the question arises which policy conclusions are the ‘least irrational’ under those circumstances.

I argue that, when scholarship is inconclusive, one principle that should guide legislators and courts is that the number of instruments should equal the number of problems. Using a single instrument for two or more problems leads to ineffectiveness (especially if the relative social importance of the problems is unequal) and indeterminacy (because setting the compromise optimally requires empirical information on the relative social importance of the problems, which is hard to acquire). I therefore argue that legislators and courts should only deviate from this principle when they have serious indications that the underlying problems are nearly completely nonverifiable and in addition roughly equal in terms of social importance.

I show that when these guidelines are applied, the theoretical indeterminacy surrounding optimal remedies for contract breach—the poster child of indeterminacy— largely disappears.

Number of Pages in PDF File: 37

Keywords: Optimal remedies, contract breach, compromise instruments, lawmaking

working papers series