Competition Economics Director Professor Simon J. Wilkie, Competition Economics Director Dr. Michael A. Williams, and Vlad Radoias publish an article entitled “Rules of Evidence and Liability in Contract Litigation: The Efficiency of the General Dynamics Rule” in the Journal of Public Economic Theory.
The General Dynamics v. U.S. case raises several interesting questions. Namely, first, which liability rule is more efficient: (1) forcing the contractors to be strictly liable for their failure to perform or (2) the General Dynamics rule? Second, what are the optimal bidding functions under strict liability (SL) and the General Dynamics rule? Third, how does the game change if the evidentiary rules require a buyer’s private information to be admitted in court and used by the contractor in its defense?
The article analyzes the welfare implications of three different sets of evidentiary and liability rules in contractual disputes with private information. When contracting parties are aware of the presence of private information, they anticipate future conflicts and litigation, and contracting terms are directly influenced by the applicable legal rules. In a contracting auction setting, the article authors studied the effects of a strict liability (SL) rule; an evidentiary rule that allows the contractor to build a case around the withholding of private cost information by the buyer (the Disclosure of Private Information (DPI) rule); and the General Dynamics rule.
The article’s authors find that the rules of evidence and liability strongly affect the incentives of both the contractors and the buyer. The article shows that, as long as there is at least one bid, General Dynamics yields higher efficiency than both the SL and DPI rules.