Overcoming Theoretical Indeterminacy

Abstract

Law and economics has become one of the leading research programs in law. Yet, after four decades it still cannot answer simple questions such as what is the optimal remedy for contract breach. The problem is not limited to contract law. There is also no consensus on other simple questions, such as whether losers should pay winners’ legal fees or whether tort law needs to be reformed. In a widely cited 2003 Yale Law Journal article, Professor Eric Posner argued that economic analysis of contract law has been a failure when it comes to generating clear-cut explanations or policy recommendations. The reason, he argued, is that the theoretical results depend on the values of the parameters. But empirical data are usually not available. The resulting lack of consensus is the main reason why law and economics has had such a small impact on treatises, textbooks, and court decisions. This essay offers a breakthrough to this major problem. I show that most of the indeterminacy in contract scholarship is due to the ‘bad habit’ of trying to solve many problems with a single legal rule. Doing so is problematic for two reasons. First, such a single rule will be a compromise rule, which is not very effective at solving all the problems. Second, choosing the right compromise requires information on the relative social importance of all the problems; such information is nearly impossible to get, and therefore makes the discussion indeterminate. The solution I propose is simple: use a separate rule or doctrine per problem. In practice, this involves using more fault rules and avoiding strict liability or pricing rules. But theoretical scholars should also do what empirical scholars have done for so long—formulate rules of thumb and evidence burdens to get out of indeterminacy. This essay is the first to propose such a rule of thumb for theoretical research: when considering strict liability or pricing rules to solve more than one problem at the same time, discard problems with a social importance of less than 10% of the total. The reason is that loss-sharing strict liability rules can in such cases solve no more than 1% of the total problem. Applying these proposals to contract remedies, I show that determining optimal rules becomes remarkably simple, and that most of the indeterminacy disappears.