Hadley reprise.

• Author: Adler, Barry E.
• Position: Response to articles in this issue, p. 1591, 1615

In response to my article in this issue,(1) Ian Ayres and Robert Gertner(2) as well as Lucian Bebchuk and Steven Shavell(3) defend their work on default rules that can induce separation of contract parties by type. Each set of authors accepts the central insight of my article, that a pool can form on a penalty-default rule even where the party to a contract with private information also has market power. But each stresses that such a pool is neither inevitable nor necessarily common. Each forcefully states that under some circumstances, perhaps a broad range of circumstances, a penalty-default rule may efficiently induce separation. Let me state emphatically that I agree.

It was never my purpose to tear down penalty-default analysis or to deny the potential benefits of separating equilibria. My goal instead is to challenge and refine the standard analysis. So I do not believe that penalty defaults are "only efficient in a narrow set of circumstances";(4) I say instead that penalty defaults are efficient in a narrower set of circumstances "than previously understood."(5) And although I do believe that determination of the appropriate default rule may well be difficult,(6) all I claim to demonstrate is that such determination is more difficult than prior analysis of the Hadley case might suggest.(7) Indeed, I am quite explicit that my own analysis "demonstrates limitations on and complications with penalty-default rules, but offers no easy solution."(8)

As each set of respondents notes, I was less cautious on this point in an earlier draft, where I suggested that uncertainty about separation militates in favor of traditional default-rule analysis. Though I said nothing stronger, this statement was glib, as it did not specify the advantages of the traditional approach. So I removed the statement. To be sure, I continue to claim that in the selection of a default rule, all else equal, other factors may be more important than the potential for party-type separation where such separation is uncertain. And I do illustrate these other factors with an example in which "sellers but not buyers are informed as to what the default rule is."(9) But I do not claim that these factors involve "[fewer] practical problems for lawmakers than the considerations" of the standard analysis.(10) I offer no opinion on the difficulties that a lawmaker might face in the estimation of other factors. Whatever those difficulties, in comparison, the expected advantage of...