Reconsidering Contractual Liability and the Incentive to Reveal Information

19 Pages Posted: 19 Sep 1999 Last revised: 5 May 2009

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

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Abstract

In an earlier work, we analyzed how the legal rules governing contractual liability affect the transfer of information between the parties to the contract. In particular, we showed how limitations on contractual liability might lead high valuation buyers to reveal their valuation of performance, and we identified the circumstances under which such limitations on liability are and are not socially desirable. In an article forthcoming in the Stanford Law Review, Barry Adler develops a critique of our analysis, as well as of that of Ayres and Gertner, who independently argued that contractual rules can beneficially facilitate information transfers. We reconsider here the subject of contractual liability and the revelation of information and respond to Adler's critique. We find Adler's model to be a natural extension of ours rather than a departure from it. Our reexamination leads to the conclusion that the informational effects that our work analyzed are important to take into account in designing contract rules.

JEL Classification: D81, D82

Suggested Citation

Bebchuk, Lucian A. and Shavell, Steven, Reconsidering Contractual Liability and the Incentive to Reveal Information. Stanford Law Review, Vol. 51, pp.1615-1627, 1999; Harvard Law and Economics Discussion Paper No. 255, 1999. Available at SSRN: https://ssrn.com/abstract=165094 or http://dx.doi.org/10.2139/ssrn.165094

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Steven Shavell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-495-3668 (Phone)
617-496-2256 (Fax)

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