Document Type

Article

Abstract

This paper extends the law and economics literature on the foreseeability doctrine, and on contract default rules more generally. It derives (numerically) the optimal default cap on contractual damages in a model with a continuum of buyer types and perfect competition among sellers. When communication costs are low, the optimal cap is significantly higher than the damages incurred by the average buyer. A better performance technology reduces the optimal damages cap. Greater homogeneity among buyers increases the optimal cap. The paper identifies conditions under which an optimally defined foreseeability threshold significantly increases welfare. It also explores the normative implications of the doctrinal preclusion of a zero damages default.

Date of Authorship for this Version

January 2006

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