Reconsidering contractual liability and the incentive to reveal information

In an earlier work, Professors Lucian Arye Bebchuk and Steven Shavell analyzed how the legal rules governing contractual liability affect the transfer of information between the parties to a contract. in particular, they showed how limitations on contractual liability might lead high valuation buyers to reveal their valuation of performance, and they identified! the circumstances under which such limitations on liability are and are not socially desirable. In an article published in this issue of the Stanford law Review, Professor Barry E. Adler develops a critique of Professors Bebchuk and Shavell's analysis, as well as that of Professors lan Ayres and Robert Gertner, who independently argued that contractual rules can facilitate transfers of information. Professors Bebchuk and Shavell reconsider here the subject of contractual liability and the revelation of information and respond to Professor Adler's critique. Professors Bebchuk and Shavell find Professor Adler's model to be a natural extension of theirs rather than a departure from it. Their reexamination leads to the conclusion that the informational effects that their work analyzed are important to take into account in designing contract rules.