Empirically Assessing Hadley v. Baxendale

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.

Number of Pages in PDF File: 54

Keywords: Contract theory, law and economics, empirical analysis, subjective valuation

JEL Classification: K12

Accepted Paper Series