Simple Rules for Simple Courts: Specific Performance, Expectation Damages and Hybrid Mechanisms

Abstract

Arguments for and against property rules (roughly equitable remedies) and liability rules (legal remedies) have been largely based on efficiency considerations. Courts can clearly determine efficient remedies when they are sufficiently informed about the valuations of parties. However, courts are rarely so well informed and thus they guess (often incorrectly) which remedy will lead to an efficient outcome. This research presents conditions where uninformed courts can reach efficient outcomes using simple direct mechanisms, mechanisms that are essentially hybrids of equitable and legal remedies. The principal result here is that a court does not have to guess when it can effectively harness the private information possessed by other parties. This result holds even though the court does not actually acquire the private information, though it does require that one of the litigating parties observe some of the other party's information.