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          \begin{center}
\begin{large}
 {\bf Mutual And  Unilateral Mistake in Contract Law}\\
  \end{large}
        
         \today  \\
        \bigskip
 Eric Rasmusen and Ian Ayres$^*$\\
         
          
 \end{center}

 November 21, 1992 draft. Published,{\it  Journal of Legal Studies } (June 1993),
22: 309-343.\\
 
 \begin{small}
      
               \noindent 
\hspace*{20pt} 2000: Eric Rasmusen, 	Professor of Business Economics and
Public  Policy and Sanjay Subhedar Faculty Fellow,   Indiana University,
Kelley School of Business, BU 456,   
  1309 E 10th Street,
  Bloomington, Indiana, 47405-1701.
  Office: (812) 855-9219.   Fax: 812-855-3354. Erasmuse@indiana.edu.
Php.indiana.edu/$\sim$erasmuse.
 \end{small}

  %---------------------------------------------------------------
       \newpage
 
 
\begin{center}
 {I. INTRODUCTION    }
 \end{center}
 
Much of private law is devoted to the prevention of  mistakes  on the one hand and
the amelioration of their
consequences on the other.  In contract
law, however, the  term ``mistake'' is  applied specifically to   situations where
the parties'
beliefs about the world are incorrect at the time of contracting. If
writing contracts were costless, the parties would specify which of
their beliefs were crucial to the  agreement and condition performance
 on those beliefs, just as they would avoid all ambiguity in
defining performance by including all details that might be relevant.
Since   reading and writing contracts is costly, courts sometimes fill gaps in
incomplete contracts
by supplying the omitted terms,   asking
what the parties would have specified ex ante had contract-writing been
costless. When beliefs are mistaken, the court  might follow a similar
rule, not by adding omitted terms (since the contract is
unambiguous), but by modifying the contract to express  the true
intentions of the parties.  Or, the court could
reform the contractual obligations by voiding the contract,
leaving  the recontracting to the parties involved. Reforming or
voiding contracts, however, goes beyond the gap-filling function in which
courts customarily engage; it is an almost paternalistic change in
the contract's express terms. Hence, contract law must be very careful how it
treats ``mistake.''
 
 
   The law makes a distinction between  incorrect  beliefs    at the time of
contracting--- ``mistake''--- and incorrect beliefs about events occurring after
the agreement but
before performance--- which are performance excuses.$^{1}$    Excuse
for incorrect beliefs about later events are classified as
performance excuses rather than formation excuses, and while they
raise similar issues, we will not treat of performance excuses
here.$^2$ Mistake itself covers a broad set of situations, and courts
  often distinguish between {\it unilateral
mistake} and {\it mutual mistake}, a distinction that will be the
focus of this article. A unilateral mistake is an incorrect belief of
one party that is not shared by the other party.  A mutual mistake is
an incorrect belief shared by both parties.  The conventional wisdom is
that the contract is more likely to be voidable if the mistake is mutual, a
distinction emphasized by courts for over a century.$^3$  
 

 Although   judicial excuse for either
unilateral or mutual mistake is relatively rare, courts continue to cite mutual
mistake as
grounds for avoidance. Law digests continue to list mutual mistake as
a separate doctrine with  regular new holdings,
and the term appears frequently in contract cases.$^4$    Informal excuse is also
common.  Many stores allow
customers to return merchandise even when no promise to do  had earlier been made,
and in transactions between
businesses, purchasers are often allowed to cancel orders even though
this may formally be a breach of contract.$^5$   
  The distinction between mutual and unilateral mistake has been
incorporated into the {\it Restatement (Second) of Contracts}. 
The {\it Restatement} provisions include   the following three sections, excerpted
here in part:
 
  \begin{quotation}
    {\bf  $\S$152. When Mistake of Both Parties Make a Contract Voidable
 
   (1) Where a mistake of both parties at the time a contract was
made as to a basic assumption on which the contract was made has a
material effect on the agreed exchange of performances, the contract
is voidable by the adversely affected party unless he bears the risk
of the mistake under the rule stated in $\S$154.''
       }
    \end{quotation}
    

 
   It is more difficult to obtain excuse for unilateral mistake,
which requires the same conditions as mutual mistake plus either
condition $\S$153 (a) or $\S$153 (b).
 
 
   
   \begin{quotation}

 
{\bf  $\S$153. When Mistake of One Party Makes a Contract Voidable
 
  Where a mistake of one party at the time a contract was made as to
a basic assumption on which he made the contract has a material
effect on the agreed exchange of performances that is adverse to him,
the contract is voidable by him if he does not bear the risk of the
mistake under the rule stated in $\S$154, and
 
  (a) the effect of the mistake is such that enforcement of the
contract would be unconscionable, or
 
  (b) the other party had reason to know of the mistake or his fault
caused the mistake. }
    \end{quotation}

  
 
   Both of these
 rules depend on the definitions of ``basic assumption,'' which the
{\it Second Restatement} leaves unclear, and on ``bears the risk,'' the
subject of $\S$154:$^6$ 
    
 \begin{quotation}
 
   {\bf$   \S$154,    When a Party Bears the Risk of a Mistake
 
 A party bears the risk of mistake when
 
(a) the risk is allocated to him by agreement of the parties, or
 
(b) he is aware, at the time the contract is made, that he has only
limited knowledge with respect to the facts to which the mistake
relates but treats his limited knowledge as sufficient, or
 
(c) the risk is allocated to him by the court on the ground that it
is reasonable in the circumstances to do so.}
 \end{quotation}

 
 
 Unsurprisingly, courts are left puzzled about when to void for
mistake.  One casebook says ``The case law in this area is confused
beyond reconciliation. Courts cannot agree on what is ``mutual'' and
what is ``unilateral'' and in many jurisdictions cases can be found
in which relief is granted in both situations, however they are
defined.''$^7$  In his classic
treatise, Corbin says:
 
  
 \begin{quotation}
  Statements are exceedingly common, both in texts and court
opinions, that relief will not be given on the ground of mistake
unless the mistake is ``mutual.'' Such a broad generalization is
misleading and untrue. Seldom is it accompanied by either definition
or analysis.... The statement will seldom be found in cases in which
relief is granted; in the cases refusing relief and making the
statement as a reason for so doing, the court has always considered
and weighed the additional factors that accompanied the
mistake.$^8$    \end{quotation}
     
 
 Cooter and Ulen suggest that the courts use the terms for {\it ex
post} rationalizations of their holdings:
 ``In such disputes, the terms `mutual mistake' and `unilateral
mistake' often become emptied of their original meanings... Thus, the
term `mutual mistake' will be used to announce a decision not to
enforce the promise, and `unilateral mistake' will be used to
announce a decision to enforce the promise.''$^9$ 
 
   Are there good reasons for distinguishing between mutual and
unilateral mistake?  A number of authors in law and economics have
examined mistake, but the emphasis has been on unilateral mistake and
disclosure rather than on whether the mistake is mutual.$^{10}$  
   
 
      A normative assessment of the law of mistake needs not only to
examine the different judicial treatment of unilateral and mutual
mistakes, but
     also the de facto standard of many courts to reject most claims
of excuse based on
mistake.
 This article   analyzes the economic effects of three
stylized excuse
     standards:\\
   \hspace*{ 12pt}
      (1) {\it Excuse for Unilateral Mistake.}  A party can rescind if
he was mistaken,\\
          (regardless of whether the other party was mistaken or not).\\
    \hspace*{ 12pt}
      (2){ \it  Excuse for Mutual Mistake.}  A party can rescind only if
buyer and seller were  both mistaken.\\
    \hspace*{ 12pt}
      (3) {\it  No Excuse. } No party can  rescind,   regardless
of mistakes.
 
     With some latitude in interpretation, courts following the
{\it Second Restatement} could end
     up with any of these rules.  The unilateral mistake rule of excuse results if
courts    under {\it Restatement} $\S$153(b) that defendants   should have known
that the
plaintiff was mistaken.  Excuse for mutual mistake is broadly mandated by $\S$152
on its face.
However, the no excuse rule may result if a court  concludes under    $\S$154 that
plaintiffs generally assume the risk of mistake  because  they know  that
mistakes occur with some probability .  
 
          
    The classic case  of mistake is {\it Sherwood v.
Walker}.$^{11}$      Seller Walker
owned breeding cows, worth between \$750.00 and \$1,000.00, and
barren cows, worth about \$80.00.  Buyer Sherwood inspected an
apparently barren cow,   Rose 2nd of Aberlone, and decided to buy
her.  A price was agreed upon---5.5 cents per pound---but before the exchange of
money and
cow, Walker found
Rose was pregnant and refused to part with her.  The court said that
if both parties thought the cow was barren (a question   for the jury),
the contract was voidable on grounds of mutual mistake.
 
    The three models of mistake below will highlight different ways that 
excuse rules  affect efficiency. In Model I, the excuse rule
affects the parties' ability to avoid transactions that have negative
gains from trade. Model II shows how excuse rules influence parties'
incentives to collect information. Finally, Model III analyzes how
different excuse rules distribute risk.

 We will conclude that excuse for mistake is sometimes
appropriate, but not just because the
     mistake is mutual.  The common law's tendency to grant excuse
for mutual   but
     not unilateral mistake does not   maximize the social
surplus from contracting.
     Excuse for unilateral mistake can in a limited set of
circumstances be justified as a way
     to  (a) reduce         the number of value decreasing transactions,
   (b) reduce the costs of collecting information, and (c) reduce  the artificial
risk of fluctuations in payoffs.
Mutual mistake rules   are broadly dominated by the no
excuse and unilateral mistake standards.
 
 
%---------------------------------------------------------------
 \begin{center}
  { II. MODEL I: THE GAINS FROM TRADE WHEN INFORMATION IS CASUALLY ACQUIRED  }
  \end{center}

 Even if  one party to a contract does not want to trade at the
price agreed upon,   the transaction might still  create
gains from trade, because the    other party's benefit might still exceed the
cost of the first party.  Efficiency-minded policymakers wish to encourage excuse
for
mistake if it increases the gains from trade, and discourage it otherwise.
 This section explores how excuse
standards concerning mistake can channel parties towards
value-enhancing trade.
 
 In accordance with the story in {\it Sherwood v. Walker}, let a
risk-neutral buyer and seller begin with an expectation that the
product being sold has a relatively low value but might be worth much
more.  The product's true value to the seller is $V$, which takes the
the normal
low value $ v_0 $ with probability $1-\alpha$  and the  surprising high value
$v_1$ with probability $\alpha$.   The value to the
buyer is  $v_0+b_0$ or $v_1+b_1$, depending on the value of $V$, where
$b_0$ is positive, but $b_1$ might be negative. We will define $p_0 \equiv v_0 +
b_0$ and $p_1
\equiv v_1 + b_1$.  $b_1$ and $b_0$ represent the gains from trade
when the product value is high and low respectively. If $b_1$ is
positive, mistaken trade still results in  efficient allocation; if
$b_1$ is negative, mistaken trade is inefficient. In {\it Sherwood v.
Walker}, this is the difference between a buyer willing, if
necessary, to pay the full-information price of a fertile cow and a
buyer who was unwilling. Assume that even if $b_1$ is negative, $v_1
+b_1 > v_0 + b_0$, so the product is worth more to the buyer when it
takes a high value. Otherwise, the buyer would voluntarily rescind
mistaken sales.$^{12}$ 
 
 
  The concept of ``mistake'' is tricky to define.  If Sherwood thinks   the
probability the cow is fertile is one percent, he is, in
one sense, always mistaken: the true
probability is either zero or one. Let us say that a party is
mistaken when he is uncertain of the true value and it turns out to
be high.$^{13}$ Thus, an uninformed party is mistaken
with probability $\alpha$.
 
   Model I assumes that if the value is high ($V=v_1$), the seller becomes
informed of the mistake with probability $f_s$, and the buyer with
probability $f_b$, before the contract is signed and without any decision on how
much care to take. Let $g_s= 1-f_s$ and
$g_b= 1-f_b$ be the corresponding probabilities of   being
uninformed.  An informed party has the option to credibly reveal the
presence of a mistake to the other party, but an uninformed party
cannot credibly show that he is uninformed.$^{14}$    After the opportunity for
revealing information has passed, the seller makes one
take-it-or-leave-it offer to the buyer, at price $P$, which the buyer
accepts or rejects.$^{15}$  If the buyer accepts, the true value is revealed to
both
parties. Depending on the legal rule, the seller may then be able to
spend $L$ and rescind the sale.
 
 Let us make the following three assumptions. (1) The litigation cost $L$ is small
enough
that the seller would be willing to rescind for the sake of the high
value even if he had to give up the price the buyer would pay for the
low value: $v_1-L > p_0$.  Otherwise, the legal rule is irrelevant, 
since the seller would never void the contract. (2) When the buyer is
indifferent about whether to buy the good, he will
buy (similarly, when indifferent about whether to disclose information, the buyer
will
disclose.   (3) The probability $\alpha$ of a mistake is small enough that an
uninformed seller would prefer to propose $p_0$, which even the
uninformed buyer would accept, rather than propose $p_1$ in the hope   that
the value is both high and known to the buyer.
A sufficient condition for this when $b_1 \leq 0$ is that 
 \begin{equation} \label{assumption}
 b_0> \alpha (v_1-v_0).
 \end{equation}
   The equivalent condition when $b_1 >0$ is $b_0> \alpha (p_1-v_0)$. 

The equilibria for this model are summarized in Table 1, which divides the payoff
outcomes depending on whether there are gains from mistaken trade or not, and
whether one or both parties  are mistaken (states I to V).


TABLE 1 GOES HERE. 
   
  
  
Let us first suppose that the gains from mistaken trade are positive
($b_1 > 0$).
 
     {\it No Excuse.} Under the no excuse rule, the seller will
always disclose the high value, in order to charge a higher price,
and the buyer will always refuse to disclose, for the converse
reason.  Trade will take place in all five states of the world listed in 
Table 1.  If
the seller is informed, he will disclose the value to the buyer and
charge the buyer's reservation value, $p_1$.  If the seller is
uninformed, he chooses a price $p^*$ between $p_0$ and $p_1$ which is
set at the level  that   
 induces an uninformed buyer to buy:
 \begin{equation} \label{P*}
    p^* =
\frac{(1-\alpha)p_0 + \alpha g_s g_b p_1}{(1-\alpha) + \alpha g_s g_b
}  
 \end{equation}
   Even though the take-it-or-leave-it offer gives the seller the
bargaining power, the buyer earns a positive rents (of $p_1 - p^*$)
on his information in state III, which occurs with probability
$\alpha g_s f_b$. Since trade always takes place, and there are no legal costs,
the combined surplus is $(1-\alpha)b_0 + \alpha b_1 $.
    

 
     {\it  Excuse for Mutual Mistake.}  The seller   will disclose
information to obtain a higher price.  The buyer will refuse to
disclose information of high value, because when
 the mistake is unilateral he need not fear rescission.  The contract
price is $p_1 $ if the seller knows (and discloses) that the value is
high (in states IV and V), and $p_0$ in the
 other states of the world.  The buyer again earns positive rents on
his private information (in state III) equalling $p_1-p_0$ with
probability $\alpha g_bf_s$.  The contract at price $p_0$ will be
rescinded if and only if there is a mutual mistake (state II).  The
rescission occurs with probability $\alpha g_sg_b$ and causes a
rescission cost of $L$ and a loss of $b_1$ in gains of trade.
Subtracting this from the surplus without rescission gives a net
surplus of $\alpha b_1 + (1-\alpha)b_0 - \alpha g_sg_b(b_1 + L)$ for the two
parties combined.
 
     {\it Excuse for Unilateral Mistake.} Both the buyer and seller
disclose the high value if they know it: the seller to obtain a
higher price; the buyer, because the sale would be rescinded anyway
if he failed to disclose.  The price is $p_1$ in states III, IV and V, 
because the seller knows there is a high value; and $p_0$ in states I
and II,  because the  buyer will not pay more than the low value when the contract
is voidable
  whenever the value is high.  Because the buyer is willing to reveal private
information of high value, there will only be
rescission when there is mutual mistake (in state II).  This result
is the same as under the unilateral mistake rule, so the
 expected surplus is again $\alpha b_1 + (1-\alpha)b_0 - \alpha
g_sg_b(b_1 + L)$.  The two excuse rules divide these gains differently, however.
The
unilateral mistake standard does not allow the buyer to capture any
returns from private information,  because whenever the seller is
mistaken the contract can be rescinded--- so the buyer has a zero
payoff under unilateral mistake.  But the buyer has strictly positive
expected payoffs under a mutual mistake standard because the seller
cannot rescind contracts in state III.
  
  \noindent  
{\it A.  Negative Gains from Mistaken Trade}

 Now let us consider the equilibria when the gains from mistaken trade are
negative (so $b_1 < 0$).
Under these conditions, trade will not take place if the seller is
informed (either directly or through buyer revelation) that the value
is high, because he prefers his own value, $v_1$, to the most the buyer
would pay,  $p_1$.  Consequently, the first-best expected
social surplus is $(1-\alpha)b_0$.  The issue of seller disclosure is 
moot because a seller informed of high value simply refuses to offer a 
price below $v_1$--- so whether or not an informed seller reveals, 
there will be no trade.
 
     {\it  No Excuse.}  The buyer will not disclose to take advantage of
private information.  No trade occurs when the  seller is informed that the value
is
high.  As above (when $b_1 > 0$), an uninformed seller offers a price
$p^*$---which allows the informed buyer to earn a positive payoff in
 state III of ($p_1 -
p^*$) with probability $\alpha g_sf_b$.  The uninformed buyer's
expected return (in states I and II) is 0. In states II and III,
the uninformed seller loses $b_1$ more than
the buyer gains.
The total expected surplus is $(1-\alpha)b_0 + \alpha g_sb_1$. 
 
    {\it   Excuse for Mutual Mistake. } The buyer   refuses to disclose, 
in order to take advantage of his private information.  The informed
seller   refuses to trade.  Because the seller can rescind for mutual
mistake (in state II), a price of $p_0$ is the maximum amount that
the seller can extract from an uninformed buyer.  The seller rescinds at
cost $L$ when there is  a mutual mistake (in state II).  The buyer earns
a positive payoff of $(p_1 - p_0)$ in state III but as before the seller
loses $b_1$ more than the buyer gains.  Accordingly, the expected
social surplus is $(1-\alpha)b_0 + \alpha g_sf_bb_1 - \alpha g_sg_bL$.
 
     {\it  Excuse for Unilateral Mistake.}  The buyer is willing to
disclose,  because any non-disclosure of high value will end in
rescission.  The informed seller refuses to trade.  The uninformed
seller charges $p_0$ (which because of rescission for mutual mistake is  
again the maximum amount that an informed buyer will pay).  The seller
rescinds at cost $L $ when there is mutual mistake (in state II).  The
buyer earns zero payoff in all states of the world, because the
unilateral mistake rule does not allow the buyer to earn any returns
on private information.  The seller (and therefore the social) gains
from trade equal $(1-\alpha)b_0 - \alpha g_s g_b L$.
 
   The right-hand column of Table 1 summarizes the buyer, seller, and
total surplus expected under each rule.  Choosing a rule that
maximizes the total gains from trade depends on the size of the
gains from mistaken trade.  If there are gains even from mistaken
trade ($b_1 >0$), then the no excuse standard maximizes the gains of
trade, because its payoff is higher by $\alpha g_s g_b (b_1+L)$
than the other rules.  No contracts are voided, because voiding
destroys the gains from trade and incurs rescission costs.
 
 If, on the other hand, mistaken trade is inefficient ($b_1 <0$),
then  excuse for unilateral mistake maximizes social surplus if
rescission costs are low.  The no excuse standard results in
inefficient trades that cost society $ \alpha g_sb_1$, whereas under the
unilateral mistake standard some of those trades are prevented by
buyer disclosure and the rest are rescinded, at expected cost $\alpha
g_s g_b L$. If the trade loss is greater than the litigation cost, that is    if 
 \begin{equation} \label{eq1}
         |b_1| >  g_b L, 
         \end{equation}
              then excuse for
unilateral mistake maximizes the gains from trade; otherwise, a no
excuse standard is best.  A mutual mistake rule can be preferable to
a no excuse standard if there are sufficiently large inefficiencies from mistaken
trade [($b_1
< -g_b L/(1-f_b)]$, but it is definitely inferior
to excuse for unilateral mistake, because it has the same expected
rescission costs
 but
generates an extra  loss of $\alpha g_sf_b b_1$ due to unilaterally mistaken
trades in which the buyer makes the purchase solely because of the
seller's mistake.
 
  Overall, the mutual mistake standard  never maximizes social
surplus. When the
 gains from mistaken trade are positive, it voids too many contracts,
which makes it inferior to the no excuse standard.  When the gains
are negative, it discourages
   informed buyers from volunteering their
information and results in unrescinded bad trades, which makes it
inferior to the unilateral mistake rule.
 
 
   The law's preference for mutual mistake   cannot be explained
by the courts' ability to distinguish between situations where the gains
from trade will be positive and those where they will be negative.
If $b_1$ can take   either a positive or a negative value and courts
only know the probability that the gains of trade will be positive,
then the single legal rule that maximizes society's gains of trade
can be either the no excuse or the unilateral mistake standard,  depending on the
relative size of the gains of trade and the costs of
rescission.$^{16}$    The mutual mistake standard can never produce better
results than the unilateral
 mistake standard because both produce the same social surplus when
the gains from mistaken trade are positive, and the mutual mistake
standard is less efficient when gains from mistaken trade are
negative.$^{17}$   
 
 The inferiority of the mutual mistake standard   is
qualitatively robust, but quantitatively it is important to remember
that recontracting limits the inefficiencies generated by
non-rescinded inefficient or rescinded efficient trade.  Typically
the loss from a bad default rule in contracts is limited by
transaction costs, and here is no exception.$^{18}$   If $b_1 >0$, and the
seller rescinds the contract under the unilateral or mutual mistake
standards, he can be expected to resell the good to the buyer.
   If $b_1 <0$, the ability to recontract reduces the inefficiencies
associated with both the no excuse and the unilateral excuse
standards.  If the seller (under a no excuse standard) is unable to
rescind, the buyer can   resell the good to the
seller.$^{19}$  Under a unilateral mistake
standard, the seller who finds it profitable to rescind will instead
negotiate with the buyer to contractually nullify the original
agreement.  In each case, extra transaction costs are incurred.  The
relevant question becomes whether   recontracting is more
costly than voiding the contract. The possibility of recontracting
replaces the inefficiency of mistaken trade ($b_1$) and the
inefficiency
  of rescission ($L$) with the smaller inefficiency of the
recontracting.  An inequality analogous to inequality (\ref{eq1})
will still characterize when the unilateral mistake rule maximizes
gains from trade, but $b_1$ and $L$ need to reinterpreted as the
smaller transaction costs that the parties will bear when confronted
with the prospect of inefficient trade or inefficient
rescission.$^{20}$  
 
      The rules affect not only the total gains from trade,  but how
those gains are distributed between the buyer and seller.    Although we have
assumed that the seller has the  power to make a
take-it-or-leave-it offer, the buyer can expect a positive return
from
 his private information under either the no excuse or the excuse for
mutual mistake rule.  (The buyer gains nothing from private
information of a high value under a unilateral excuse standard,
because the seller can rescind any trades where the buyer alone was
informed of a high value.)  Regardless of whether there are gains
from mistaken trade, the buyer prefers a
 standard of mutual mistake to a no excuse standard, and prefers the
no excuse standard to a standard of unilateral mistake.  While both
the no excuse and mutual mistake standards give the buyer positive
returns, the mutual mistake standard gives buyers a higher payoff
because uninformed sellers offer lower prices when there is excuse
for mutual mistake.$^{21}$     Thus, although
mutual mistake does not
 maximize total social surplus, it does maximize ``consumer
welfare'' if the mistake is that he value is higher than expected.   The law's
facial preference for the mutual mistake
standard might be understood as a preference for a rule that offers a
more equitable distribution of the gains from trade---even if it
means sacrificing the size of the total pie. 
 
\begin{center}
 {\it B. Defining ``Basic Assumption'' }
 \end{center}
 
  Model I suggests a way for judges to give content to the {\it Second
Restatement}'s
troublesome term ``basic assumption.''    The definition of this term is crucial.
The  difficulty of doing so consistently
led legal realist commentators   to claim  that ``Few legal conceptions
have given rise to more useless doctrine and abortive principle than
has `mistake' '' and 
  ``...no test which will invariably distinguish between the
intrinsic and the extrinsic has ever been devised, and it is believed
that the distinction so attempted is both unsound in theory and
impossible in practice.''$^{22}$  

  
Using the insight of Model I, let 
 a ``basic'' assumption  be defined as one that
determines whether the gains from mistake trade are positive. The
judge does not need to worry about fundamental philosophic or
linguistic questions of what the parties meant when they referred to
the traded good; the question comes down to whether performance
increases the welfare of the buyer more than it reduces the welfare
of the seller.  Or, put differently, would the trade have taken place
under suitably modified terms even if the parties not been mistaken?
If so, the mistake does not concern a basic assumption.$^{23.}$ Such a definition
rules out minor mistakes based on fluctuating
market conditions, even though fluctuating conditions would alter the
contract price.$^{24}$  Defining
``basic assumption'' in terms of whether there are still gains from
trade is not the same as defining it based on whether there  is
a substantial change in the value of performance.  If $v_1=100$,
$v_0=10$, and $b_1=b_0=5$, the mistake makes a large difference in
value (105 versus 15), but has no effect on the gains from trade, so
it does not involve a basic assumption. Trade would take place
even under perfect information;  only the price would change.
  To be consistent with Model I, the basic assumption test would be a
necessary but not sufficient condition for efficient excuse.  If a
judge found that there were still gains from the mistaken trade,
there would be no finding of basic assumption and therefore no
excuse.  Even if the judge found that mistaken trade produced negative gains ($b_1
< 0$), there would only be excuse (following
inequality (\ref{eq1}) above) if the expected costs
 of rescission were less than the inefficiency of mistaken trade:
$             (1- f_s )L < |b_1| .
  $     
       
              
                    
 Model I   suggests interpretations of other terms in the law.
First, when ``the other party had reason to know of the mistake,''
$\S$153 (b) of the {\it Second Restatement} classifies the situation
as a known unilateral mistake, and allows excuse even though the 
mistake is not mutual.  An informed buyer may know that seller would
not want to enter the contract at the  price offered,  because either (1) there
are negative gains from mistaken trade or (2) the offered price
 is lower than the amount an informed seller would offer.  Consonant
with our definition of ``basic assumption,'' known unilateral mistake
should only be found in the first case---where it is negative gains
from trade and not simply a low contract price that would have
deterred an informed seller's offer.  This interpretation would
  maximize social surplus in Model I.  When
the gains from mistaken trade are positive, there would be no finding
of a mistaken ``basic assumption'' and the efficient no excuse
standard would therefore apply.  When the buyer knows that an informed seller
would not have
wanted to sell even at the buyer's reservation price (that is   , $b_1 < 0$),
however, courts might be
inclined   both to find a
mistaken basic assumption and to find a ``known unilateral mistake,''
which would effectively allow excuse for merely unilateral mistake.$^{25}$     

The same idea may be applied to distinguish between two moral
dilemmas described by Cicero, but old even in his
time.$^{26}$    In the first dilemma,
there is a famine at Rhodes, so the price of grain is very high, but, unknown to
the citizens,  several  ships full of grain are on their way   from Alexandria.
 Does the owner of the first ship to arrive
have a duty to disclose that grain prices   will shortly
fall?$^{27}$   In the second dilemma, the seller of a house knows
that it is unsanitary, and the buyer does not. Does the seller have a
duty to disclose the unsanitariness of the house? Cicero would
require disclosure in both situations. But a distinction based on
Model I is that in the case of the grain at Rhodes, there are positive
gains even from mistaken trade--- the only impact of the information
is on the price. In the case of the unsanitary house, on the other
hand, an entirely different class of purchaser may be interested in
buying unsanitary houses, even when the price falls, so the
information affects not only the price but the ultimate ownership. Legal rules
should encourage disclosure when   non-disclosure would  result in a transfer to
someone who places less value on the good in question.$^{28}$
 
 \begin{center}
 {\it C. Application to Sherwood v. Walker}
 \end{center}
 
  Let us now return to {\it Sherwood v. Walker} and see what sense
can be made of it.
      A fertile cow is different enough from a barren cow that a
buyer willing to buy a barren cow at a low price might not be willing
to buy a fertile cow at a high price.  If both parties mistakenly
believed the cow to be barren, the gains from trade were likely to be
negative when the cow turned out to be fertile, because the seller
was well situated to sell both fertile and barren cows but the buyer
would presumably have had higher costs of
resale.$^{29}$   Thus,
voiding for mistake would avoid negative gains from trade.
  
 {\it Wood v. Boynton} is often paired with   {\it Sherwood v. Walker} to show at
contradictory court treatment.$^{30}$    Wood sold a small uncut gemstone of
unknown identity to Boynton, a jeweller, for one dollar.  Unknown to
either of them, the stone was a diamond, worth 1000 dollars. The
court ruled that in the absence of fraud, the jeweller could keep the
stone, even though the mistake was mutual. Why the difference from
{\it Sherwood v. Walker}? ---Because in  {\it Wood v. Boynton}, unlike {\it
Sherwood v. Walker}, there is a much larger likelihood of gains from  mistaken
trade: a jeweller has more use for an uncut diamond. Thus, in the spirit of Model
I, no excuse is needed for mistaken trade if efficiency is our only   concern.
  
Illustration 1 of $\S$152 of the {\it Second Restatement}
illustrates the idea of negative gains from trade even more simply:
$^{31}$   
  
  \begin{quotation}
  ``$A$ contracts to sell and $B$ to buy a tract of land, the value of
which has depended mainly on the timber on it. Both $A$ and $B$ believe
that the timber is still there, but it has been destroyed by fire.
The contract is voidable by $B$.''
 \end{quotation}
   
 
   $B$ believes he is buying timber, with some land attached, but the
timber no longer exists.  Given that $B$'s purpose in buying  
has been eliminated, the gains from trade are likely to be negative.
But this would still be true whether or not the mistake were
unilateral.  Thus, while the illustration is used as an example of
excuse for mutual mistake, our Model I suggests that excuse for
unilateral mistake would provide a better standard.  As argued above,
courts
 might invoke the ``known unilateral mistake'' exception of  
{\it Restatement} $\S$153(b) to void
the contract because the nature of the mistake is a clear sign of
negative gains from trade.


\begin{center}
{\it D.  Buyer Mistake}
 \end{center}

 The party adversely affected by the mistake in Model I is the
seller.
 If the mistake adversely affects the buyer,   a
new argument for excusing unilateral mistakes is introduced, because the quantity
of unilateral mistakes becomes endogenous.  The mistake is that the product is
worth less than
expected.  If such a product is less costly for sellers to produce, a no excuse
rule gives sellers
incentives to increase the quantity of unilateral mistakes by the buyer.  When the
mistake
adversely affects the seller, the
quantity of unilateral mistakes may also be endogenous increased under a mutual
mistake
standard, if the
the buyers can avoid excuse for mutual mistake by converting a mutual mistake
(neither party
knows the good's value is high) to a unilateral mistake (only buyer knows).  The
mistakes which adversely affect the seller, however, are not caused by the
buyer, and imposing a no excuse rule would not induce more mistakes.

 The real losses under the current mutual mistake rule from sellers' increasing
the quantity of
unilateral mistaken trades that
adversely affect the buyer are potentially large. The problem is
serious enough that the law gives the mistaken buyer an implied warranty remedy
that is even
stronger than the buyer's remedy for unilateral mistake.$^{32}$  If the seller is
a merchant with respect to the good in question,
the {\it Uniform Commercial Code} establishes
 an implied warranty that the title is valid and the goods
are ``merchantable,'' which requires that they be ``of fair average
quality'' and ``are fit for the ordinary purposes for which such
goods are used.''$^{33}$   If the buyer is relying on the seller's skill and
the seller has reason to know that the buyer intends the goods for a
particular purpose, the U.C.C. also imposes an
implied warranty that they will be fit for that
purpose.$^{34.}$  When the good turns out to be less valuable
than expected, the buyer can ask for more than just to be returned to
his initial position; he can ask to be put in the position he would
have been in had the good been as valuable as
claimed.$^{35}$   Thus, if Sherwood contracted to sell Walker a pregnant cow that
turned out
to be barren, Walker would have a cause of action for breach of warranty.
Moreover, the
U.C.C.'s implied warranty applies to even unilateral mistakes: the seller bears
the loss even if
the buyer was ignorant that the goods were flawed.
Here, too, the distinction between mutual and unilateral mistake is
undermined.



 
 %---------------------------------------------------------------

\begin{center}
 { III.  DELIBERATE ACQUISITION OF INFORMATION: MODEL II }
\end{center}
 
     The rule governing excuse for mistake can also influence
parties' incentives to acquire information.  In analyzing mistake,
Anthony Kronman distinguished between casual and deliberate
acquisition of information.$^{36}$  In Model I, we assumed that information was
casually
acquired---  the buyers and sellers were informed with
exogenous probabilities.  Now, we relax this assumption
and explore a model in which the buyer and seller can acquire
information for a price. 

 Buying information is a form of
 taking care to avoid mistakes.
Model I showed how a unilateral excuse rule could
mitigate the possibility of negative gains from a mistaken trade.
Here, we explore whether excusing contractual obligation could be
justified as a way to coordinate the efficient production of
 information.  Model II uses the same assumptions as Model I with two exceptions:  
(a) it eliminates the possibility of causually acquired information by assuming
that the buyer and the seller have the option of spending
  $c_b$ and 
$c_s$ to become informed of the good's value before agreeing to the
contract (where $c_s$ is high enough relative to the cost of
rescission that the seller would not incur it just to avoid the
possible rescission costs, that is   , $ c_s > \alpha L$) ; and (b) it eliminates
the possibility of inefficient trade (by
setting $b_1=0$) that drove the normative analysis of Model I, to  instead focus
on the efficiency of
information acquisition . The appendix finds the Nash
equilibria and the welfare surplus under each excuse standard,  using different
parameter values
for the buyer's and the seller's cost of acquiring information. 

   At the outset, note that the gains of trade would be
maximized if the buyer and seller could commit to ignorance, for
while the information is deliberately acquired it is not socially
productive; the non-negativity of $b_1$ implies that trade should
take place whether or not the value is high.$^{37}$   If the parties
committed to being uninformed, a no excuse standard would maximize
gains from trade.  The parties would trade in all states of the world
at the uninformed price, $p^* = \alpha v_1 + (1- \alpha )(v_0+b_0)$, 
 and the seller would capture all of these first-best gains from
trade, equalling $ (1- \alpha )b_0$.  Yet because the parties {\it  cannot}
commit to ignorance, a no excuse standard does not
 necessarily maximize the joint gains from trade.$^{38}$  


  {\bf No excuse standard}. Under the no excuse
standard, the type of equilibrium will depend on the size of the
information costs. 

     {\it Equilibrium A.  High Information Costs for both Parties.} If the
information costs $c_s$ and $c_b$ are sufficiently high ($Min\{c_s,
c_b\} > \alpha (v_1 -
 p^*$)), then neither party will try to become informed, and the
first best total surplus will be achieved.  

{\it Equilibrium B.  Low Information Costs for just the Buyer. } If the buyer's
information cost is low but the seller's is not ($c_b < \alpha (v_1 -
p_0)< c_s$), the equilibrium is in mixed strategies. The buyer
sometimes acquires information, and the seller sometimes charges
$p_1$, sometimes $p^*$. There cannot be an equilibrium in which the
buyer always acquires information, because  the seller would always charge
$p_0$, $^{39}$    and
the buyer would then  have no reason to acquire information
(since he would buy in any case).  

 
     {\it Equilibrium C.  Low Information Costs for the Seller. } If the seller's
information cost is sufficiently low ($c_s < \alpha (v_1 - p_0)$), he
will acquire information.  He would like to conceal the information
if the good's value is low, but since the buyer knows the seller
acquires information in equilibrium, seller silence would betray that
the value is low, so the price the seller can charge is $v_1$ or
$p_0$, depending on the good's value. The buyer will refrain from
acquiring information, because he is able to deduce the value from
the seller's behavior.  The gains from trade equal the first-best
surplus minus the costs of the seller's information.  

    {\it Intermediate Information Costs for the Seller.} If the seller's cost of
information
lies in an intermediate range ($ \alpha (v_1 - p*) < c_s < \alpha (v_1 - p_0)$),
both  the high
and  low information
cost equilibria (A and C) are possible.$^{40}$   There are two equilibria because
the buyer's expectations determine
how he reacts to lack of disclosure.  If the buyer expects that the
seller will acquire
 information, but the seller is silent, the seller can only charge
$p_0$, which in turn gives the seller a strong incentive to
acquire information.  If the buyer expects the seller not to acquire
information, on the other hand, the seller can charge a higher price
($p^* >  p_0$) after remaining silent. Thus, the seller has more
incentive to collect information if the buyer thinks he will do so,
generating multiple equilibria.  Even though the high cost
equilibrium produces larger gains from trade, buyer expectations for
this intermediate range of costs can induce the seller to collect
information.
  
  {\bf Excuse for Mutual Mistake.}  Under the mutual
mistake rule, the type of equilibrium will depend on whether the seller's
costs of acquiring information are more or less than $ \alpha  (v_1 -
p_0$).

     {\it High information costs.} If the cost of information is
high, then no information is collected by the buyer or the seller.
The price is $p_0$ (since the sale will be rescinded if the value is
high), and rescission costs will be incurred. The gains of trade will
be equal to the first-best surplus, $(1-\alpha)b_0$, minus the
expected rescission costs, $ \alpha L$.

{\it Low Information Costs for just the Buyer. } If the buyer's
information cost is low but the seller's is not ($c_b < \alpha (v_1 -
p_0)< c_s$), the buyer alone acquires information and the seller
charges $p_0$. The total surplus is $(1-\alpha) b_0 - c_b$. 

    {\it Low Information Costs. } If the information cost for both the buyer and
seller is low
(less than $ \alpha (v_1 - p_0)$), the
equilibrium is in mixed strategies. The seller has no incentive to
acquire information unless the buyer does, because the seller can
void the contract when the buyer is uninformed.  But the buyer only
wants to acquire information if the seller does not; this is a
discoordination game.$^{41}$   In equilibrium, some buyers and sellers acquire
information, in proportions that make every party indifferent between
acquiring and not acquiring. With some probability, each party is
informed, both are informed, or neither is.  Mixed strategy
equilibria need to satisfy the requirement that in   equilibrium
each player must be indifferent between playing the equilibrium mixed
strategy and either of
 the pure strategies (of becoming informed or staying
uninformed).$^{42.}$     Because a buyer earns zero surplus from the pure strategy
of staying
uninformed (whether or not the seller is informed),$^{43}$  the buyer must expect
the same zero payoff from the mixed
strategy of sometimes becoming informed.  Analogously, the uninformed
seller in the mixed strategy equilibrium must earn the same expected
payoff of $p^* - c_s$ that he is certain to earn if he becomes
informed.$^{44}$  
    This means that the social surplus from
 the mutual mistake standard when costs are low will equal the social
surplus from the no excuse standard when the seller's costs are low.$^{45}$     


  {\bf Excuse for Unilateral Mistake.} Under the unilateral mistake
rule, neither party becomes informed, regardless of the size of the
information cost, since the seller can rescind for either mutual or
unilateral mistake.  The price equals $ p_0$, because contracts are
voided whenever the value of the good is high, and rescission costs
$L$ are incurred with probability $\alpha.$ The total gains from
trade under the unilateral mistake standard equal the first-best
surplus of $(1-\alpha)b_0$ minus the expected costs of rescission, 
$\alpha L$.
 
  {\it Choosing the Optimal Rule}.  In this model, the mistake rules
defining the conditions for excuse both affect the amount of
information acquisition and whether the trade takes place.  Since,
unlike in Model I, information acquisition is inefficient, rules that
minimize the total of acquisition and rescission costs are most
efficient.  Table 2 summarizes the results.


 INSERT TABLE 2 HERE


  When the cost of information is low ($c_s < \alpha (1-\alpha) (v_1
-p_0)$), the unilateral mistake standard maximizes expected
surplus.  The no excuse and mutual mistake standards both yield
surpluses of $ (1-\alpha)b_0 -c_s$,  but the unilateral mistake standard
yields $(1-\alpha)b_0 -\alpha L$, which is bigger by the assumption
that $ \alpha L<c_s$.  The low cost of information gives sellers an
incentive under the no excuse standard to expend $c_s$ for information.
Excuse for mutual mistake slightly reduces the expected costs of
information acquisition (even though in the mixed strategy
equilibrium buyers and sellers at times both will expend the cost), but
increases the expected costs of rescission an equivalent amount.  When
information cost are low,
 only the excuse rule of unilateral mistake deters sellers from
acquiring information--- because the seller is protected by the
possibility of rescission.  Ex post rescission is costly, but less
costly than prior care (that is   , acquiring information).  When
information is cheap, none of the rules can avoid the inefficiencies
of acquisition and rescission---but the unilateral mistake rule
minimizes the sum of these inefficiencies.
 
 When the cost of information for both the buyer and seller is high (greater than
$\alpha (v_1
- p_0)$), the no excuse rule
maximizes surplus.$^{46}$  The no excuse rule yields the first-best surplus of
$(1-\alpha)b_0 $, whereas the unilateral mistake and mutual mistake
rules yield $(1-\alpha)b_0 - \alpha L$.  When information is costly
enough, neither party will acquire it regardless of the
legal rule---but the unilateral and
mutual mistake standards for excuse still induce costly litigation to induce
rescission. Thus, the no excuse rule is best. When information is cheap for the
buyer, whether or not it is cheap for the seller, the litigation cost becomes
bearable  because it has the benefit of inducing information acquisition, and the
unilateral mistake rule is best, as shown by the boxes in the left two columns of
Table 2.
   The choice of efficient rules complements the analysis of Model I.
The mutual
 mistake standard never maximizes the gains from trade.  The no
excuse standard or excuse
 for unilateral mistake produce the largest gains from trade for
certain parameter value.  In Model I, the unilateral mistake standard
maximized the gains from trade when the expected costs of rescission
were less than the expected costs of inefficient trade.  In Model II,
the unilateral mistake standard dominates no excuse when the expected
costs from rescission are less the expected costs of information
production.$^{47}$ 

 
   The motives for information acquisition are different under each
legal rule.
 Under the  no excuse rule, the seller has the greatest incentive to acquire
information and under the unilateral mistake rule the
least.$^{48}$      There is no pure strategy
equilibrium in which only the buyer acquires information.  Under the
unilateral mistake rule, the buyer can never benefit from private
information because an uninformed seller can always rescind mistaken
trades.  And under the no excuse rule, the seller acquires
information whenever it would have been profitable for the buyer to
gain private information---thereby preempting the gains from private
information.  Under mutual mistake, the buyer has the motive to
convert rescindable mutual mistakes into non-rescindable unilateral
mistakes, and the seller has the responsive motive to turn unilateral
mistakes into mutual knowledge.
   The inability of buyers to profit from private information also
affects the distribution of the gains from trade.  For although the
prospect of private information allowed buyers to earn positive
expected profits under the no excuse and mutual mistake rules in
Model I, the buyers earn no such information rents in Model II.  The
expected buyer's payoff under all rules is zero---  the total
gains from trade   also represent the seller's
payoffs.  The buyers are indifferent among the different rules; and
the sellers simply prefer the most efficient.  Thus, unlike in Model I, 
buyers do  not have a private incentive to support the socially
inefficient excuse for mutual mistake standard.

\begin{center}
 {\it A.  The Confounding Effects of Productive Information  }
 \end{center}
 
The welfare comparisons of Table 2 are premised on the
fact that the benefit from information acquisition is purely
redistributive.  Different orderings are possible, however, if
information at issue is socially useful.  If information is
productive and information costs are low, the no excuse standard can
become the most efficient rule, because the seller always acquires
information; and the
 unilateral mistake rule can be least efficient because no
information is ever acquired.
 
 Information might be productive rather than merely redistributive
for several reasons.  For example, if information is not acquired
before trade, the high value may never be revealed at all.  Models I
and II assumed that after the agreement was made, the good's value
would be exogenously revealed, but it may be that the high value is
revealed only by putting the good to a different use, which would not
be done unless its value is discovered by other means.  Information
acquisition is then productive rather than redistributive. The seller
has incentive to acquire information under any rule, but if he does
not always succeed in acquiring it, a rule which also encourages
buyer investigation is desirable.    In {\it Leitch Gold Mines, Ltd. v.
Texas Gulf Sulphur Co.},   the paradigmatic case for Shavell's article on
unilateral mistake,$^{49}$   the information that a plot of land contained
valuable minerals would likely not have been discovered had the buyer not made a
costly investigation.$^{50}$  Productive information of this kind increases the
desirability of
the no excuse standard, but again gives no reason to choose the
mutual mistake rule.$^{51}$  


 
  \begin{center}
 {\it B. Examples   }
 \end{center}
 
 This analysis of information collection  helps  explain court intervention for
``errors of expression'' and
``scrivener's mistakes,'' as opposed to the   ``errors of fact'' we have so far
been discussing.
 Bidders in sealed-bid
auctions sometimes make computation errors in calculating their
costs, submit too low a bid, and ask courts to rescind.  {\it M. F. Kemper
Const. Co. v. City of Los Angeles et al.}$^{52}$  is typical.  Kemper bid \$780,
305 to build a piping system, having
omitted a cost item of \$301,769 from its internal cost estimate,
completed late at night just before the bid deadline. The company
discovered its error several hours later and sought discharge of its
bid bond, but the city pointed to a clause in the bid 
 that said
bidders ``will not be released on account of errors.''  The court
granted release nonetheless, saying ``There is a difference between
mere mechanical or clerical errors made in tabulating or transcribing
figures and errors of judgement, as, for example, underestimating the
cost of labor or materials.''$^{53}$  
  

 
   If bidders are held to mistaken bids, they will take more care in
making their bids, but it may be more efficient to allow rescission.
This is consonant with the conclusion of Model II that excuse for
unilateral mistake rule is efficient when
 the costs of acquiring information is relatively low.  This is
especially true if the costs of recontracting are low, as in {\it
Kemper}, where the mistake was found soon enough that
the city could turn to the second-lowest bidder. If the mistake had
been found later, the city would have had to repeat the bidding
process, incurring a variety of costs for which the bid bond might
serve as liquidated damages.  Errors of judgement are difficult
enough to prevent that the mistake rule matters less in inducing
care. Moreover, they are often discovered so late   that the
recontracting cost is high, it is harder for the court to discover
the error, and they are more likely to create real costs instead of
just transfers, so   extra care might be desirable. Thus, errors
of expression, which are relatively trivial in their real
consequences and their cost of prevention  if not their
redistributive consequences, are better grounds for excuse.
 

  Model II might also give insights for analyzing courts' willingness
to reform errors of expression.  In {\it Berke Moore Co. v. Phoenix
Bridge Co.}, $^{54}$ a general
contractor building a bridge hired a subcontractor to the concrete
work for \$12.00 per square yard of ``concrete surface included in
the bridge deck.'' After the work was completed, the contractor
offered to pay for the square footage of top surface (4,184 square
yards), but the subcontractor claimed payment for the bottom and
side surfaces as well (approximately 4,000 additional
square yards).
The court held for the general contractor on the
ground that at the time of contracting both parties had thought only
the top surface was included, even though the contract might
objectively read otherwise.  This makes sense from the point of view
of preventing unnecessary care, and the reasoning makes sense whether
the mistake was mutual or unilateral.
 
 \begin{center}
 {\it C.  Productive Information and Negative Gains from Mistaken
Trade  }
 \end{center}
 
    Both Models I and II showed that a unilateral mistake rule at
times would be
 efficient (by  reducing the inefficiencies of mistaken trade or
non-productive information acquisition), but that a mutual mistake
rule never maximizes the gains from trade.  It is possible to  
combine aspects of both models and produce a scenario in which excuse
for mutual mistake is efficient.  In particular, the conflict
between the two goals of efficient trade and  efficient information 
production  do provide a reason for the mutual mistake
rule in  a limited context.  The complexity of the
assumptions needed to generate this result, however, may ultimately
lend more support to the larger thrust of this article --- that it is
difficult to give an efficiency justification for a mutual mistake
rule.
  Consider a model with the following four assumptions: (1) As
discussed in Model I, assume that the gains from mistaken trade are
negative ($b_1 < 0$) so that the object is worth more to the seller than the
buyer when the value is high; (2) As in Model II, suppose that the buyer
can investigate whether there has been a mistake (that is   , whether value
is high) at cost $C$ --- but that investigation only yields
information about the value with some probability less than one; (3)
Assume that the seller's cost of investigating the value are
prohibitively high---so that the seller as a practical matter will
never become directly informed ex ante; and (4) Finally, as discussed
above as an example of productive information, suppose that the true
value is exogenously revealed ex post  with only some
probability less than one,    so that without any investigation the
high value may be lost through ignorance of the good's best use.
   Under the unilateral mistake rule, the buyer will not acquire
information, and sometimes the benefit of the high value is lost.
Under a no excuse rule, the buyer will investigate if $C$ is
sufficiently low. If the buyer does not investigate, or investigates
and fails, then even when a high
 value is exogenously revealed ex post, the gains from trade are
negative. Under the mutual mistake rule, the buyer has incentive to
acquire information if $C$ is low, but the trade is rescinded if both
parties are mistaken and the value is exogenously revealed. This is
the best rule because it encourages information acquisition while
rescinding inefficient trade when it occurs accidentally rather than
because of superior information.  Some inefficient trades are not
rescinded, but that is the price paid for encouraging information
collection.
 
    {\it Sherwood v. Walker} may in fact be an application of this
idea.  Information acquisition was likely to be allocative rather
than just redistributive, since someone who discovered that Rose was
fertile would breed her rather than put her to a less valuable use as
meat.  To encourage information acquisition, the legal rule should
allow the buyer to profit from his information, even at the cost of
negative gains from the trade itself.  This is precisely the setting
of the previous paragraph, in which the unilateral/mutual distinction
makes sense, and it justifies the court's decision. If Walker could
somehow show that Sherwood bought the cow for meat, not for breeding,
the contract should be voided because the trade was inefficient;
otherwise it should be enforced, to reward Sherwood's good judgement.
 
 
%---------------------------------------------------------------
 
\begin{center}
 {  IV.   RISK: MODEL III  }
 \end{center}
 
  The legal and economic meanings of ``risk'' are almost  opposite.
Consider how
 the no excuse rule affects a simplified version of Model I in which
neither buyer nor seller gains knowledge of the good's value before
contracting ($f_s = f_b = 0$).  In legal (and everyday) usage, the risk
is on the seller under the no excuse rule.  He bears the risk of the
transaction, because he loses the benefit of the high value if there
is a mistake. In economic usage, the risk is on the buyer, because  the
seller's ex post wealth equals the uninformed price ($p^*$), which,
being
 certain,  is riskless, whereas   the buyer's ex post wealth equals the
value of the good, which is variable.  If the seller is risk averse
and the buyer is risk neutral, the no excuse standard efficiently
allocates the risk.  If the buyer is the risk-averse trader, however, a
mutual mistake rule   more efficiently distributes the risk.
Under mutual mistake the price will equal $p_0$ and the seller will
rescind whenever the value is high.  Mutual mistake ensures that the
risk averse buyer bears no risk, because he receives a zero payoff
with certainty while the seller payoffs absorb all the fluctuations
 in value.
    
   Model III attempts to highlight two effects of risk on the choice
of efficient law: (a) The legal rule can actually reduce the total
amount of risk, rather than just shifting it from one party to
another; and (b) The efficient rule may need to trade off the costs
of inefficient ``artificial'' risk against the inefficiencies of
mistaken trade (as analyzed in Model I).  Some risks are natural; when    the
value of an object
is risky, one party or the other must bear that risk regardless of
the legal rule. Other risks--- that of a scrivener's error, for
example---are artificial, in the sense that the legal rule can reduce
the variance in payoffs.  If the parties might mistakenly leave a
zero
 off the contract  price, there would be a substantial change in parties'
payoffs under a no excuse standard, but only a slight change in
payoffs under   excuse for mutual mistake.  The court's use
of the mutual mistake standard ex post can drastically reduce the
amount of ex ante risk.  This risk reduction  does create   rescission
costs, however, and the   optimal   legal rule needs   to account
not only for the amount of artificial risk but for the costs of
rescission.
  
  For  a clearer picture of the difference between ``natural'' and
``artificial'' risk, consider the following two hypotheticals
from $\S 12$ of the {\it Restatement of Restitution}.
 
   
  \begin{quotation}
   ``$A$ enters a second-hand bookstore where, among books offered for
sale at one dollar each, he discovers a rare book having, as $A$  knows,
a market value of not less than \$50. He hands this to the proprietor
with one dollar. The proprietor, reading the name of the book and the
price tag, keeps the dollar and hands the book to $A$. The bookdealer
is not entitled to restitution since there was no mistake as to the
identity of the book and both parties intended to bargain with
reference to the ability of each to value the book.''$^{55}$ 

 
 \vspace{20pt}
 
  ``$A$, looking at cheap jewelry in a store which sells both very
cheap and expensive jewelry, discovers what he at once recognizes as
being a valuable jewel worth not less than \$100 which he correctly
believes to have been placed there by mistake.  He asks the clerk for
the jewel and gives 10 cents for it. The clerk puts the 10 cents in
the cash drawer and hands the jewel to $A$. The shopkeeper is entitled
to restitution because the shopkeeper did not, as $A$ knew, intend to
bargain except with reference to cheap jewelry.''
 
        \end{quotation}
         
         
  The first hypothetical is like {\it Sherwood v. Walker} in the
sense that the uncertainty is over whether the object offered for
sale is valuable or not.  Either the buyer or the seller will reap a
windfall from the mistake, and the only question is who gains the
windfall.$^{56}$  The second hypothetical is different because the
uncertainty is over whether the seller misprices the object. Like a
scrivener's error, the risk is due to human error: that an expensive
jewel will be mistakenly placed in the wrong bin.  It is difficult to
precisely compare risks in Models I and II, because the standard
economic definition of risk compares riskiness across rules only when
the average value remains constant.$^{57}$  A pure artificial risk
exists: (a) if the uncertainty does not effect the combined wealth of
buyer and seller, but (b) if one party makes a mistake, the other
party reaps a positive windfall (and the mistaken party loses a corresponding
amount).  The legal
rule can play an important role in reducing this type of risk.  
 
 
     To see the implications, let us suppose that the value
of the object being sold is constant at $V$ for the buyer and 0 for
the seller, and that the seller makes a take-it-or-leave-it offer.
With probability $(1-\alpha)$, he charges the price of $V$. With
probability $\alpha$, however, he makes a scrivener's error (for
example, omitting a zero) and charges a price of only $p_1<V$. With
probability $\alpha f_b$ the buyer realizes this mistake, so the
mistake is unilateral; with probability $\alpha g_b $ the buyer
  does not  realize that the  low price is a mistake, 
so the mistake is
 mutual. After
entering into the contract, any mistakes are revealed, and the seller may be
able to rescind the sale at cost $L$ and resell at price $V$,
depending on the legal rule.  Let us assume that the buyer reveals
the mistake if he cannot benefit from it.
 
    Each triplet in Table 3 represents the payoffs under the  no mistake,
unilateral mistake, and mutual mistake rules.  If there has been no
mistake, the legal rule does not matter: the seller's payoff is $V$
and the buyer's is 0. Under a no excuse rule, given either unilateral
or mutual mistake the seller obtains a payoff of $p_1$ and the buyer
obtains $V-p_1$. Under the unilateral mistake rule, the buyer will
reveal the mistake if he is aware of it, and the payoffs will be $V$
and 0; if he is not aware, the sale will be rescinded at cost $L$ and
the transaction repeated at the high price, for payoffs of $V-L$ for
the seller and 0 for the buyer. Under the mutual mistake rule, the
payoffs are $p_1$ for the seller and $V-p_1$ for the buyer under
unilateral mistake, and $V-L$ for the seller and 0 for the buyer
under mutual mistake, since rescission and resale then occur.
 

 INSERT TABLE 3 HERE
 
   
     The significance of Table 3 is in showing the riskiness of the
payoffs under each rule. The unilateral mistake rule has the least
risk in the sense that
 the payoffs under each possible situation are the most
similar---identical for the buyer, and differing only by the cost of
rescission for the seller. Under the mutual mistake rule, the
parties' have similar payoffs under no mistake and mutual mistake,
but very different payoffs when the mistake is unilateral.  The risk
is greatest under no excuse, where even a mutual mistake creates a
big change in payoffs. Thus, if the parties are risk averse, the
unilateral mistake rule would seem to be the best for reducing risk.
Model III thus suggests another reason for rescission, but not a
reason that favors the mutual mistake rule.
 
      Reductions in risk and in information collection will often be
complementary goals.
   {\it Berke Moore Co. v. Phoenix Bridge Co} and {\it M. F. Kemper
Const. Co. v. City of Los Angeles et al.}, discussed in the previous
section, are like the jewelry-store hypothetical in that the risk is
artificial rather than natural. In all three cases, the mistake is
created by the carelessness of one party, it creates risk, and it
provides incentives for excessive care under no excuse. Thus,
when the benefit of care is merely redistributive it ought doubly to
be discouraged: to reduce risk as well as the cost of care.
 
 
 
%---------------------------------------------------------------
  
 \begin{center} {   V. CONCLUDING REMARKS}
 \end{center}
 
   The vexing question of    when to void contracts on grounds of mistake does not
have  a general answer. This article has focused on two considerations that can
effect the
efficiency of various excuse standards: the gains from mistaken trade and the
cost of care to avoid mistake.  If the gains from trade are negative
when one or both parties are mistaken, or if care to avoid mistake is
redistributive rather than productive, rescission should be granted, 
if its litigation cost is low. This is quite different from the rule in
tort law, where the basic principle is that liability should be
placed on the least-cost avoider, because in contract, unlike
tort, the care may just serve to redistribute wealth  and the harm
from mistake can be undone by rescission of the contract.  
    When the parties must choose whether to deliberately acquire information about
whether a
they have mistakenly valued the object in question, the choice of the excuse
standard can induce
a variety of mixed strategy equilibria.  Under a mutual mistake standard (when
costs of
acquiring information are low), the buyer only wants to acquire information if the
seller does
not (because if both acquire, the buyer cannot profit from private knowledge).
But the seller
only wants to acquire information if the buyer does (because if neither acquire,
the seller can
rescind when value is high).  The equilibrium to this discoordination game
involves each party
choosing to become informed with only some positive probability.   The unilateral
mistake rule, however, eliminates these
strategic incentives to acquire information, because the seller can rescind any
contract where it
has remained uninformed.  
   The two principles of avoiding negative gains from trade and inducing
appropriate care will justify excuse for mistake in some cases and
not others, but they generally will not support the traditional rule
that rescission is granted only for mutual, not unilateral mistake.
Often, however, they will come to the same result, because the
presence of negative gains from trade should alert the non-mistaken
party to the mistake, which under traditional law permits the
contract to be voided.  Moreover,  if information is productive, it
may be desirable to use the unilateral mistake rules to give incentives to become
informed while
rescinding contracts when the information has not been acquired.
 
  %---------------------------------------------------------------

 \newpage
 
   
 \begin{center}
 APPENDIX: EQUILIBRIUM OUTCOMES IN MODEL II
  \end{center}
  
   This appendix finds the equilibria for Model II under different
parameter values.  
   If both parties are known to be uninformed, the price is $ p^*=
\alpha v_1 + (1-\alpha)(v_0+b_0) .$
     

  
   {\it   If  there is a NO EXCUSE rule then:  (i) If 
 \begin{equation} \label{e1c}
  Min\{c_s,c_b  \}\geq   \alpha (v_1-p^*),   
 \end{equation}
  there exists an equilibrium in which neither party investigates,
the price is $p^*$, and the total surplus is $(1-\alpha)b_0$.
 (ii) If
    \begin{equation} \label{e7}
 c_s \leq \alpha (v_1  - p_0)  
    \end{equation}
  there exists an equilibrium in which only the seller acquires
information, and  the price is $v_1$ if the value is high and 
 $ p_0$ if  it is low. The  total surplus is $(1-\alpha)b_0 -c_s$. 
   (iii) If $c_b\leq \alpha(v_1-p^*)$ and $c_s > \alpha(v_1-p^*) $,   
      there exists a mixed-strategy equilibrium in which the buyer
acquires information with positive probability, the price is $p_0$ or
$p^*$, and the total surplus is $(1-\alpha)b_0 - \frac{c_b}{\alpha(
v_1 - p^*)} (v_1-p_0) $.  }  
  
 \noindent
 {\it Proof:} (i) The seller will offer the maximum the buyer would
accept, which is 
 the ex ante expected value $p^*$.  The seller's payoff for the no excuse high
cost equilibrium   is   the price he obtains,
  \begin{equation} \label{e2}
 \pi_ s  = p^*.  
 \end{equation}
 If the seller were to deviate and become informed, he could reveal
his information and sell at
 $ v_1$  when the value was high and $p^*$
when it was low. This would yield him a payoff of
 \begin{equation} \label{e4}
 \pi_ s (deviate) = \alpha v_1  + (1-\alpha) p^* - c_s  
 \end{equation}
  The payoff in (\ref{e4}) is less than the payoff in (\ref{e2}) by amount $
\alpha v_1 -\alpha
p^* -c_s$, so deviation does not yield
positive profits for the seller if (\ref{e1c}) is true.  
 
 
 The buyer's payoff is the expected value of the product to him
minus the price:
 \begin{equation} \label{e3}
 \pi_ b  = [\alpha  v_1  + (1-\alpha) (v_0 + b_0)] - p^* = 0.
 \end{equation}
   Under a no excuse rule, if the buyer deviates by becoming informed,
he will refrain from buying if he does not discover the value is
high, and remain silent and pay $ p^*$ when he does discover it to
be high.  His deviation payoff is therefore
  \begin{equation} \label{e6}
 \pi_ b( deviate) = \alpha (v_1 -p^*) + (1-\alpha)(0) -c_b,
 \end{equation} 
 which is nonpositive if  
 condition (\ref{e1c}) is true. Thus, the buyer will not deviate
either.


(ii) The seller's payoff  under the low cost no excuse equilibrium    is
 \begin{equation} \label{e10}
 \pi_ s  = \alpha  v_1  + (1-\alpha)(v_0+b_0) -c_s = p^*    -c_s.
  \end{equation}
 If the seller were to deviate by   not  acquiring information, his
payoff would be:
 \begin{equation} \label{e11}
 \pi_s( deviate) = p_0,
  \end{equation}
   which is smaller by 
 $\alpha
 v_1   + \alpha p_0  +c_s$ than the payoff in (\ref{e10}).
  Such deviation is unprofitable if condition (\ref{e7}) is true.

 The buyer cannot profitably deviate from this equilibrium because
the buyer can deduce the information from what the seller reveals,
and hence gains nothing from collecting his own information.

 The surplus is the seller's payoff minus his payoff if no trade
occurred, which is $p^*- c_s - (\alpha v_1 +
(1-\alpha)v_0) = (1-\alpha)b_0 - c_s .$


(iii) There cannot be a pure strategy equilibrium   because if the
buyer always acquires information, the seller will not try to charge
more than $p_0$--- but then the buyer always wants to buy, so there
is no point in acquiring information. But there is an equilibrium in
which the seller charges $ p_0$ with probability $\gamma$ and
$ p^*$ with probability $1-\gamma$; and the buyer acquires
information with probability $\theta$. The buyer will be indifferent
between his two pure strategies, with payoffs 
  \begin{equation} \label{e7a}
 \pi_b(info)= \alpha \gamma (v_1 - p_0) +\alpha (1-\gamma) (v_1 -
p^*) -c_b 
    \end{equation}
 and 
\begin{equation} \label{e7b}
 \pi_b(no\;info)=   \alpha \gamma (v_1-p_0).   
    \end{equation}
 If these are equal, then 
  \begin{equation} \label{e7c}
  \alpha (1-\gamma ) (v_1  - p^*) -c_b=0, 
    \end{equation}
     so
 \begin{equation} \label{e7d}
    \gamma  = 1- \frac{c_b}{\alpha(  v_1  - p^*)}, 
    \end{equation}
     which in turn requires that
\begin{equation} \label{e7e}
     c_b  \leq \alpha(  v_1  - p^*).   
    \end{equation}
   
 
 To find the surplus, note that the buyer's payoff is $\alpha \gamma
(v_1-p_0)$ and the seller's is $p_0$, since we can take either of the
two pure-strategy payoffs. Adding these and subtracting the payoff
from no trade, $ \alpha v_1 + (1-\alpha)v_0$, gives
   \begin{equation} \label{e7f}
   [ \alpha (1 - \frac{c_b}{\alpha( v_1 - p^*)})(v_1-p_0) + p_0] -
[\alpha v_1 + (1-\alpha)v_0] 
 \end{equation}
    \begin{equation} \label{e7g}
      = (1-\alpha) b_0 - \frac{c_b}{\alpha(  v_1  - p^*)} (v_1-p_0).
  \end{equation}

   $\Box$ 
  
      
 
   %---------------------------------------------------------------
 {\it If the rule is EXCUSE FOR MUTUAL MISTAKE, then (i) If $c_b \geq
\alpha (v_1 -p_0)$, neither player collects information. The price is
$p_0$ and total surplus equals $(1-\alpha)b_0 - \alpha L$.  (ii) If
$Max \{c_b,c_s\} \leq \alpha (v_1 -p_0)$, the seller becomes informed
with probability $f_s $ and the buyer
  with probability $f_b $, where $f_s $ and $f_b $ are
 between zero and one.  $P= v_1$ if the value is high and the seller
is informed; otherwise, $P= p_0$.   The total surplus equals
$(1-\alpha)b_0 -c_s$.
 (iii) If $ c_b \leq \alpha (v_1 -p_0)$ and $ c_s \geq \alpha (v_1
-p_0)$, only the buyer becomes informed, the seller charges $p_0$,
and the total surplus is $(1-\alpha)b_0 - c_b$.  
 }  

\noindent {\it Proof:} (i) The seller cannot gain by collecting
information because he obtains rescission anyway if the good's value
is high, and by the assumption that $c_s > \alpha L$ it is not worth
spending $c_s$ to avoid a probability $\alpha$ of rescission. The
buyer is unwilling to become informed even though by doing so he
could prevent rescission because his payoff from investigating and
buying only when the
 value is high would be $\alpha (v_1 - p_0) - c_b <0$. With
probability $\alpha$, the rescission cost $L$ is incurred. The total
surplus from trade is thus $(1-\alpha) b_0 - \alpha L$.

 
(ii) Table 4 summarizes the possible outcomes, as described in the
next paragraphs. If the seller is uninformed, he chooses the price
$p_0$, because under assumption (\ref{assumption}) he prefers to
choose a low price that the buyer would always accept rather than a
high price that only a buyer informed of a mistake would accept.
 
If both parties are informed, there is no sale if $V=v_1$, and
$P=p_0$ otherwise.  The buyer's payoff is
  $-c_b$, and the seller's payoff is $\alpha v_1 + (1-\alpha) p_0
 -c_s = p^* -c_s$. 

If just the seller is informed, there is no trade if the good's value
is high, and $P=p_0$ if the value is low. The payoffs are $\pi_ b
=0$ and $\pi_ s= \alpha v_1 + (1-\alpha)p_0 - c_s = p^*-c_s$.
 
If neither party is informed,   
 the seller voids the contract if $V=v_1$, and incurs cost $L$. The
payoffs are $\pi_ b = 0$ and $\pi_ s = \alpha(v_1-L) +
(1-\alpha)p_0  = p^* - \alpha L $.

If just the buyer is informed, the seller cannot void the contract.
The payoffs are $\pi_ b = \alpha v_1 + (1-\alpha)p_0 -
p_0 -c_b = \alpha (v_1 - p_0) -c_b$ and $\pi_ s = p_0$. 


 INSERT TABLE 4 HERE. 
  

Only a mixed-strategy equilibrium exists. As shown by the arrows in
Table 4, $\pi_s(U,I) < \pi_s(I,I)$, because $c_s < \alpha (v_1
-p_0)$; $\pi_b(I,I) < \pi_b(I,U)$; $\pi_s(I,U) < \pi_s(U,U)$
because $\alpha L < c_s$; and $\pi_b(U,U) < \pi_b(U,I)$, because $c_b <
\alpha (v_1 -p_0)$.
 In a mixed-strategy equilibrium, the players have equal payoffs from
the two pure strategies between which they mix, so the payoffs are
$\pi_ b = 0$ and $\pi_ s = p^* -c_s$, giving a surplus from trade of
$(1-\alpha)b_0 -c_s$. 

(iii) In equilibrium the buyer becomes informed and his payoff is 
 \begin{equation} \label{e8}
 \pi_b = \alpha   (v_1 - p_0) +(1-\alpha) (0)   -c_b, 
    \end{equation}
     compared with a payoff of zero if he does not become informed.
Thus, he prefers to become informed if $ c_b < \alpha (v_1-p_0)$.
     \ . The seller's equilibrium payoff is 
\begin{equation} \label{e8a}
 \pi_s= p_0,
     \end{equation}
whereas if he becomes informed his payoff is 
\begin{equation} \label{e8b}
 \pi_s( deviation) =  \alpha v_1 + (1-\alpha) p_0 - c_s.
     \end{equation} The seller will not deviate if $ c_s> \alpha
(v_1-p_0)$.  The total surplus minus the autarchy payoff is 
 \begin{equation} \label{e8c}
  \alpha (v_1 - p_0) +(1-\alpha) (0) -c_b + p_0 - [\alpha v_1 +
(1-\alpha)v_0] =(1-\alpha)b_0 - c_b.
     \end{equation}
  $\Box$

\bigskip

{\it If the rule is EXCUSE FOR UNILATERAL MISTAKE, nobody becomes
informed, the price equals $p_0$, and the total surplus equals $
(1-\alpha)b_0 - \alpha L.$}

{\it Proof:} If $V=v_1$, the seller   will rescind the
contract, so  the initial price can be no higher than $ p_0$.
 The seller's  equilibrium payoff under excuse for unilateral mistake   is
 \begin{equation} \label{e11a}
 \pi_ s  = \alpha (v_1-L) + (1-\alpha)(p_0) = p^* -\alpha L.
    \end{equation}
  If the
seller deviates by becoming informed (in which case voiding is
unnecessary), his payoff would be
 \begin{equation} \label{e12}
 \pi_ s(deviate) = \alpha  v_1  + (1-\alpha)(p_0)-c_s.
  \end{equation}
  The assumption that $c_s < \alpha L$ tells us that deviation is
unprofitable for the seller.  The buyer has no incentive to become
informed, because unilateral mistake voids the contract. $\Box$

 


  %---------------------------------------------------------------
  
\newpage
 FOOTNOTES

*Indiana University School of Business and Stanford Law School.  We would like to
thank Bruce Chapman, Eric Kades, Andrew Kull,  Katherine Koenig, Carol Rose, Alan
Schwartz,
and seminar participants at Dartmouth College, Indiana University,
 the University of Toronto, and Yale Law School for helpful
comments, and the Olin Foundation for financial support. Much of this work was
completed while the authors were visiting Yale Law School.

  1.    The chief performance excuses are ``impossibility'' (or
``impracticability''),
which refers  to unexpectedly high costs of performance, and
``frustration,'' which
 refers to unexpectedly low benefits from performance. Analytically 
these are very similar to excuse for mistake  except 
 that the high costs or low benefits might be due to the
negligence of the parties after the time of contracting.
Impossibility has its own large literature; see    Richard Posner \&
Andrew Rosenfield, Impossibility and Related Doctrines in Contract
Law: An Economic Analysis, 6 J. Legal Stud. 83 (1977); Paul Joskow,
Commercial Impossibility: The Uranium Market and the Westinghouse
Case, 6 J. Legal Stud. 119 (1977); Victor Goldberg, Impossibility and
Related Excuses, 144 J. Int'l \& Theoretical Econ. 100 (1988);
Richard Craswell, Precontractual Investigation as an Optimal
Precaution Problem, 17 J.  Legal Stud.  401 (1988); Alan Sykes, The
Rule of Commercial Impracticability in a Second-Best World, 19 J.
Legal  Stud.  43 (1990); Michelle White, Contract Breach and Contract Discharge
Due to
Impossibility:  A Unified Theory, 17 J. Legal Stud. 353 (1988). Frustration has
been less
studied.   

 

2.    Still another   contract defect is misunderstanding---   the minds of the
parties do not
meet. In  the classic case of
misunderstanding, an  agreement  specified that one party would buy 125
bales of cotton to be delivered by the ship called the Peerless
arriving in Liverpool from Bombay. {  Raffles v.
Wichelhaus}, 2 Hurl. \& C. 906, 159 Eng. Rep. 375 (Ex. 1864).  The
dispute arose because there were two ships called the Peerless
travelling that route, one arriving in October and the other in
December.  Because the term ``Peerless'' was
ambiguous, the court could not simply ``enforce the contract.''
Such a contract is void, rather than voidable. In
mistake cases, on the other hand, the contract obligations are unambiguous, but
they are
premised upon mistaken beliefs. 

3. E. A. Farnsworth, Farnsworth on Contracts 663 (1990). 

 4. See,
for example, the  1991 Cumulative Annual Pocket Parts from West's Illinois Digest
2d Vol. 10.  A Lexis search for the term ``mutual mistake'' found 111
uses in federal court opinions during 1990, with 32 of these opinions
also containing the term ``unilateral mistake.''  


 5.  As noted in Stewart Macaulay, Non-Contractual Relations in Business:
A Preliminary Study, 28 Am. Soc. Rev. 55 (1963). 

 6. The remaining sections on mistake say
that a party may request the court to correct mistakes of expression
($\S$155), that the Statute of Frauds is irrelevant to such
reformation ($\S$156), that even a careless mistaken party can seek
relief ($\S$157), and that the parties are entitled to restitution
and protection of reliance interests ($\S$158). 

7.  Addison Mueller and Arthur Rosett, Contract Law
and its Application, Second Edition, 474 (1977). 

 8.  Arthur Corbin, Corbin on Contracts  $\S$608 (1960). 

9.  Robert Cooter and Thomas Ulen, Law and Economics  258 (1988).
Similarly, it has been argued that courts resort to the simple rule
of letting losses lie where they fall, granting or denying rescission
based on whether performance has yet occurred.  Andrew Kull, Mistake,
Frustration, and the Windfall Principle of Contract Remedies, 43
Hastings L. J. 1 (1991). Kull does not address whether ``a rule of discharge for
mistake . . . is
efficient as compared with a rule of strict [contractual] liability". {\it Id.} at
5.  Kull's
assumptions, however, leave little room for mistake rules to affect social
efficiency: ``Disparities
between anticipation and realization in contractual exchange, the risk of which
has not been
allocated by the parties, are in the nature of `windfalls.' . . . As a matter of
social utility,
excluding for the moment considerations of fairness, it will ordinarily be a
matter of indifference
whether the windfall cost or benefit once realized, falls to A or to B." {\it Id.}
at 6.   Our models below will  show that  the efficient choice of excuse standards
can affect social utility by reducing
the a variety of social costs, including the costs of value-decreasing trade
(Model I), information
acquisition costs (Model II) and risk-bearing (Model III). 

 10.     Posner suggests that the risk of mistake be put on
whichever party can avoid the mistake at least cost, which in { 
Sherwood v. Walker} (see {\it infra} note 11) would be the seller.
   Richard Posner, Economic Analysis of the Law     90
(3rd ed., 1986).  Kronman notes that in unilateral mistake the mistaken party
is the least-cost avoider. He also distinguishes between
``deliberate'' and ``casual'' acquisition of information: a party who
acquires information deliberately should be allowed to take advantage
of it.  Anthony Kronman, Mistake, Disclosure, and the Law of
Contracts, 7 J.  Legal Stud.  1 (1978).  Cooter and Ulen distinguish
between productive and redistributive information. If private
information would lead to more productive use of the item being
traded, the informed party should be allowed to take advantage of his
information; if the information merely redistributes wealth, he
should not.  Cooter and Ulen, {\it supra} note  9 .  Shavell
explores the implications of this in situations where either the
buyer or the seller, but not both, may acquire information. He shows
that the difference between being a buyer and being a seller is
crucial, since the seller can capture the gains from revealing
information via a higher price.  In his model, sellers should be
forced to disclose their information, but whether buyers should be
required to disclose depends on the information's productivity.
Steven Shavell, Acquisition and Disclosure of Information Prior to
Economic Exchange, working paper, Harvard Law School (1991).  Smith
and Smith examine much the same considerations, but where both
parties may acquire information, showing that where information is
redistributive, a mistake rule discourages inefficient information
collection. Janet Smith and Richard Smith Contract Law, Mutual
Mistake, and Incentives to Produce and Disclose Information, 19 J.
Legal Stud.  467 (1990). For a recent critique that favors a more
traditional approach to doctrine, see Andrew Kull, Unilateral Mistake: The
Baseball Card
Case, 70 Washington U. L.  Quart. 57 (1992). 


 11. Sherwood v. Walker, 66 Mich. 568, 33 N.W. 919 (1887).  For a
historical and linguistic discussion, see Robert Birmingham, A Rose
by Any Other Word: Mutual Mistake in {\it Sherwood v. Walker}, 21
University of California Davis Law Review 197 (1987). 

 12.  In any case, recontracting may 
ultimately result in the efficient allocation, but it introduces extra costs.
The point remains valid that non-rescinded inefficient trade or
rescinded efficient trade is costly, but the reason is extra
transaction costs rather than inefficient allocation. 

 13.    This definition of mistake might
conflict with $\S$154(b) of the {\it Restatement}, which suggests
that a party cannot claim mistake when ``he is aware, at the time the
contract is made, that he has only limited knowledge with respect to
the facts with which the mistake relates but treats his limited
knowledge as sufficient.''  

 14. In a setting  such
as {\it Sherwood}, it may be possible for the buyer or seller to
demonstrate that the cow in question is pregnant (and therefore
fecund) but impossible to credibly demonstrate that she is barren. As
a result, an informed party can credibly inform the other party only
of a mistake--- not of its absence. If a party can credibly show that he is
uninformed, then the problem vanishes, because he either shows this---in which
case the other party feels safe in dealing with him--- or refuses to show this---
in which case the other party knows he must be informed.

15.  The simplifying assumption
that the seller makes one take-it-or-leave-it offer effectively gives
the seller the bargaining power and is common in this literature.
See, for example,     Ian Ayres and Robert Gertner, Strategic Contractual
Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L. J.
729 (1992).  

 16.  If $M$ equals the probability that the gains of
trade will be positive and $(1-M)$ the probability that the mistaken
trade will have negative value, then the expected gains from trade
from the three rules will be: No Excuse $(1- \alpha )b_0 +
\alpha[Mb_1(1-g_sg_b) - g_sg_bb_1]$, Excuse for Mutual Mistake $(1-
\alpha )b_0 + \alpha[Mb_1(1-g_sg_b) - g_sg_bL] - (1-M)b_1g_sf_b$,
Excuse for Unilateral Mistake $(1- \alpha )b_0 + \alpha[M
b_1(1-g_sg_b) - g_sg_bL]$.  The no excuse standard maximizes the
gains from trade whenever $b_1 < L$. 

   17.  The mutual mistake rule also does not serve
to distinguish transactions which have negative gains from mistaken
trade.  At first, one might think that inefficient trade is more
likely to occur when the mistake is mutual rather than unilateral.
After all, if only one party is mistaken, at least the informed
party benefits from the trade, and the only question is whether he
gains more than the uninformed party loses.  The flaw in this
reasoning is that it ignores the selection of cases which come to
court.  Trades that hurt both parties can be undone by the parties
themselves.  Thus, regardless of the rule, we are likely only to see
cases where at least one party has an interest in having the
contract enforced. 

18.   But see Ayres
\& Gertner,  {\it supra} footnote  15, at 762. 

19. Alternatively, if the buyer has not yet received the
goods, the seller might breach and force the buyer to incur some
costs of bringing or threatening suit. 

 20.  This is especially true when conjoined with the
possibility of buyer reliance, since such reliance means that by the
time of the rescission the buyer might have more use for the product
than the seller, and, in any case, the courts would have to go to the
trouble of determining restitutionary damages for the buyer. Indeed,
it is the importance of these relative costs that perhaps leads to
the ``hands-off'' court attitude   claimed by  Kull,
{\it supra}  note  9 .  


 21. The price must be higher under a
mutual mistake standard to induce uninformed buyers to buy---
because the buyer loses $p_1 - p^*$ in state II.   

 22. Myres McDougal, Collateral Mistake
and the Duty to Disclose 1, 8 (unpublished manuscript,  Yale Law School, June
1931; on file at the Yale Law Library).


 23.  What
has been called the ``Corbin Rule'' for unilateral mistake seems to
be groping towards this definition: ``If you find that the hardship
to the unilaterally mistaken party is greater than the `justifiable
expectation interest' of the innocent party, the contract should be
rescinded even though the unilateral mistake is not known to the
other party.'' John O'Connell, Remedies in a Nutshell 92 (1977). 


 24.  Cf. {\it Second Restatement}, comments to
$\S$152: ``For example, market conditions and the financial
situation of the parties are ordinarily not such assumptions, and,
generally, just as shifts in market conditions or financial ability
do not effect discharge under the rules governing impracticability,
mistakes as to market conditions or financial stability do not
justify avoidance under the rules governing mistake.'' 


25. Yet, as
before, even a finding of known unilateral mistake should only give
rise to excuse if the rescission costs in inequality (\ref{eq1}) were
smaller than the costs of mistaken trade.
  The {\it Restatement}'s
treatment of impracticability and frustration can be given a
 similar interpretation.  $\S$266 of the {\it Second Restatement}
allows a contract to be voided when a party's performance or purpose
is impracticable or frustrated even at the time
 of contract ``because of a fact of which he has no reason to know
and the non-existence of which is a basic assumption on which the
contract is made.''  Almost by definition, impracticability and
frustration apply to mistakes where the gains from trade are
substantially negative, and excuse is then allowed independently of
whether the mistake is mutual or unilateral.  Thus, consonant with
Model I, this section of the {\it Restatement} also could be read to allow
excuse for unilateral mistake when there are negative gains from
trade. 

26. Cicero, {\it Selected Works}, 178  in ``On Duties'',  (Harmondsworth, England:
Penguin, 1984).  


 27. The facts are similar in the celebrated U.S. case of {  Laidlaw v.
Organ}, 15 U.S. (2 Wheat.)  178 (1817), in which a trader with
advance news of the end of the War of 1812 did not disclose this when
buying tobacco. 

28.  This is analogous to the distinction that Cooter and Ulen make between
productive and
redistributive information. See Cooter and Ulen {\it supra} note 9. 

29.   Posner also notes that ``There was no basis
for presuming the cow more valuable in the buyer's possession than in
the seller's---its true worth being an order of magnitude different
from what the parties had thought...''  He rejects this approach,
however, in favor of asking which party could avoid the mistake at
least cost. See Posner, {\it supra} note  10,     at 90.  

30. Wood v. Boynton,  64
Wis. 265, 25 N.W. 42 (1885). 

 31.  An actual case with similar facts is {  Thwing v. Hall \&
Ducey Lbr. Co.}, 41 N.W. 815, 40 Minn. 184 (1889), in which the
buyer's agent looked at the wrong tract of land, and the timber on
the correct tract had already been cut. 

 32. Smith \& Smith,
{\it supra } note 10, at 480, first realized that excuse for unilateral mistake
could be interpreted as a
implied warranty for buyers. 

 33.  U. C. C., $\S$ 2-312
(Warranty of Title and Against Infringement; Buyer's Obligation
Against Infringement), $\S$ 2-314 (Implied Warranty: Merchantability;
Usage of Trade). 

 34.  U.C.C. $\S$ 2-315 (Implied Warranty: Fitness for
Particular Purpose). 


35.  The buyer is not protected by implied warranty if
the seller is not a ``merchant,'' but he is still protected by
mistake doctrine. In {  Smith v. Zimbalist}, 2 Cal. app. 2d 324, 38
P.2d 170 (1934), Smith sold Zimbalist two violins that they
mistakenly thought were made by Stradivarius and Guarnerius. The
trial court found no warranty because Smith was not a merchant, but
voided on grounds of mutual mistake (the appeals court did find an
implied warranty). 

 36.  Kronman, {\it supra}  note
 10. 


37.  This is the point made by 
 Cooter and Ulen, {\it supra}  note   9 .  


38.  For example, by inspecting the left
hand column of Table 2, it is easy to see that the unilateral mistake standard
produces larger
gains of trade under our assumption that $ c_s >\alpha L$. 

39. If the  seller charged more than $p_0$, only buyers with high valuations would
buy
-- and by assumption it is less profitable for seller to sell solely to the high
valuing buyers.

40.  There also exists a
mixed-strategy equilibrium in which buyer and seller each investigate
with positive probability.  The total surplus and expected surplus
for buyer and
 seller for this mixed strategy equilibrium replicates the low
information cost equilibrium (C) and is not considered here separately. 

41. On coordination and discoordination games, see  Eric Rasmusen,   Games and
Information 35, 40 (1989).

 42.  See  Rasmusen, {\it supra} note 41,   at 72.  It can be shown that these two
conditions imply that
under the excuse for mutual mistake the seller will become informed
with probability:
 $     f_s = 1 - [c_b/(\alpha (v_1-p_0))],
 $    and the buyer will become informed with probability:
 $     f_b = (c_s - \alpha L)/(\alpha (v_1-p_0) - \alpha L). 
 $           The
probability of redundant acquisition is then $f_s f_b$.  In this
equilibrium,
 the buyer and seller together average less than one acquisition of
information.  If the parties cost of collecting information is identical ($c_s =
c_b = c$), the
expected amount spent by both parties on acquiring
information is $c - \alpha g_sg_b L$.  When both parties avoid the
inefficiency of acquiring information (with probability $\alpha
g_sg_b )$, however, the seller instead is driven to rescind when
there is mutual mistake (at a cost of $ L$).  As a result, the total
costs of information acquisition and rescission equal $c$. 

43.   If both
buyer and seller are uninformed, the buyer's expected surplus is zero
because the price is $p^*$.  If the seller is informed, the high and
low prices ($P$ equalling $v_1$ or $p_0$) extract all the consumer
surplus. 


  44.  An informed seller earns $p^*-c_s$ (regardless of
whether the  buyer becomes informed) because the seller can charge the
first best price but must pay the costs of information acquisition. 



45.  As
discussed above, the no excuse standard will, however, support more
efficient equilibria for intermediate costs of acquiring information. 


46.  The efficient
rule for intermediate values of $c_s $ depends on whether the equilibrium
under the no excuse rule corresponds to the high cost (seller
uninformed) equilibrium or  the low-cost (seller informed)
equilibrium.  

47.  The point that information production can be
wasteful is similar to that in Roy Kenney and Benjamin Klein, The
Economics of Block Booking, 26 J. Law \& Econ. 497
(1983). 

 48.  Under the unilateral mistake rule, the only motive
is the seller's desire to avoid rescission costs, which is ruled out
here
 by the assumption that $\alpha L <c_s$. 

 49.  {\it Supra} note   1.  

50.  {  Leitch Gold Mines, Ltd. v.
Texas Gulf Sulphur Co.},   1 O.R. 469 (1969). The case settled. 

 51.  Different types of productive
information, however, might give rise to different efficiency
analysis.  For example, if the gains from mistaken trade are negative
($b_1 <0$), one might think that acquiring information before
transacting will prevent those losses.  This is true, but rescission
offers an even better solution, since the harm can be more cheaply
undone by voiding the contract ($\alpha L < c_s$).  Thus, if the gains
from mistaken trade are negative, the unilateral mistake rule is
still best, but for the reason of Model I rather than the reason of
Model II.
   Second, going through the contracting process and
rescinding at a late stage may incur real costs because of the cost
of writing contracts and reliance expenditures, so information has
the real benefit of saving on these costs. This is different from
negative gains from mistaken trade because voiding eliminates those
negative gains but not the contract-writing or reliance costs. If
$c_s$ were small enough, the seller would take care to avoid mistake
under any rule so as to avoid his own contract-writing cost, and
there
 is no need to adapt the rule to encourage care, because the seller,
who collects all the gains from trade, fully internalizes the benefit
of discovering mistakes in time to avoid the contracting cost. A
problem does arise, however, if the parties split the
contract-writing and reliance
 costs.  Then each party only has a loss of part of the costs if the
contract is rescinded, so it may be that neither takes the efficient
amount of care, just as when a tort causes damages to both parties
and can be prevented by either.  The no excuse standard may be
efficient to encourage the seller to take care (that is    acquire
information), but this again does not give any reason for preferring
a mutual mistake over a unilateral mistake rule.   

52. M. F. Kemper
Const. Co. v. City of Los Angeles et al.,
 235 P.2d 7 (1951)


53.  {\it Id.},     at 11.   

 54.  Berke Moore Co. v. Phoenix
Bridge Co.,
 98 N.H. 261, 98 A.2d 150 (1953). 


 55.  This
is similar to the    situation in the well-known ``baseball card
case,'' {  Irmen v. Wrzesinski}, No. 90 SC 5362 (Ill. Cir. Ct.
DuPage Co.)  [Small Claims Div.] filed June 29, 1990. See the Chicago
Tribune, 10 Nov.  1990, 6 March 1991, 5 April 1991; Bessone, What a
Card, Sports Illustrated, 18 March 1991 at 9l Kull, {\it supra} note
 10.  {\it Irmen}  settled before an opinion could be issued. 


 56. Or, perhaps, the value will not come to light
unless the buyer gains the windfall, so that the buyer's information
is productive, not redistributive. Regardless of this, a court cannot
eliminate the risk.  

 57.  The standard economic
definition of risk is based on the idea of the ``mean-preserving
spread.'' See Michael Rothschild and Joseph Stiglitz, Increasing risk I: A
Definition, 2 J. Econ. Theory 225 (1970). 

 



 
\newpage
     

           \hoffset -60pt

 \begin{tiny}
                    
       \begin{center}
\begin{tabular}{ ll| ccc cc |l}
 \multicolumn{2}{c}{  } & \multicolumn{5}{c}{STATE OF THE WORLD  } &
\multicolumn{1}{c}{ EXPECTED OUTCOME }\\
  \hline  
 \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
                   & & I &II & III & IV & V & \multicolumn{1}{c}{   }\\
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
        Probability: & & $1-\alpha$& $\alpha g_sg_b$ & $\alpha g_s
f_b$ & $\alpha f_s g_b$ & $\alpha f_s f_b$ & \multicolumn{1}{c}{  }\\ 
 Information  casually acquired by: & & nobody & nobody & buyer & seller & both &
\\
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
 &   & (no mistake)  & (mistake)  & (mistake)  & (mistake)  & (mistake)  & \\ 
                 \hline
    \multicolumn{8}{c}{  }\\ 
                  \multicolumn{8}{c}{$b_1 >0$ (positive gains from
mistaken trade) }\\ 
   \multicolumn{8}{c}{  }\\ 
     \hline
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
 {\bf   No Excuse}&  Price  & $p^*$ & $p^*$ &$p^*$ & $p_1$ & $p_1$ &  \\
                & buyer payoff & $p_0-p^*$ & $p_1 -p^*$ & $p_1-p^*$ & 0 & 0
& $\alpha g_s f_b (p_1-p^*) $\\ 
 (Seller discloses, & seller payoff & $p^*-v_0$
& $p^*-v_1$ & $p^*-v_1$ & $b_1$ & $b_1$ &$(1-\alpha) b_0 + \alpha b_1
- \alpha g_sf_b(p_1-p_0)$ \\ 
    Buyer silent) & total & $b_0$ & $b_1$ & $b_1$ & $b_1$ & $b_1$ &
\framebox{$(1-\alpha) b_0 + \alpha b_1$} \\ 
 \multicolumn{2}{c}{ } & \multicolumn{5}{|c|}{ } & \\
              \hline
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
 {\bf Mutual mistake} &  Price  & $p_0$ & $p_0$&$p_0$& $p_1$ & $p_1$ &  \\
                & buyer payoff & 0 & 0 & $p_1 - p_0$ & 0 & 0 &$\alpha
g_sf_b(p_1-p_0)$ \\ 
 (Seller discloses, & seller payoff & $b_0$ & $-L$ & $p_0 - v_1$ & $b_1$ &
$b_1$ & $(1-\alpha)b_0 - \alpha g_sf_b (p_1-p_0) + $ \\ 
 \multicolumn{2}{l}{ Buyer silent) } & \multicolumn{5}{|c|}{ } &$\alpha b_1 -
\alpha g_s g_b( b_1+L)$ \\
 & total & $b_0$ & $-L$ & $b_1$ & $b_1$ & $b_1$ &
\framebox{$(1-\alpha) b_0 + \alpha b_1 - \alpha g_s g_b (b_1+L)$} \\ 
    \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &    \\
        \hline 
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
	{\bf Unilateral mistake} & Price &
$p_0$ & $p_0$ &$p_1$ & $p_1$ & $p_1$ &  \\
             & buyer payoff & 0 & 0 & 0 & 0 & 0 & 0\\ 
	      (Seller discloses, &
seller payoff & $b_0$ & $-L$ & $b_1$ & $b_1$ & $b_1$ &$(1-\alpha) b_0
+\alpha b_1 -\alpha g_s g_b (b_1+L)$ \\ 
  Buyer discloses) & total & $b_0$ & $-L$ & $b_1$ & $b_1$ & $b_1$
&\framebox{$(1-\alpha) b_0 +\alpha b_1 -\alpha g_s g_b (b_1+L)$ }\\ 
 \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &   \\    
     \hline
              \hline
  \multicolumn{8}{c}{  }\\ 
                         \multicolumn{8}{c}{$b_1 <0$ (negative
gains from mistaken trade) }\\
 \multicolumn{8}{c}{  }\\ 
    \hline
 \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\  
  {\bf No Excuse} & Price & $p^*$ & $p^*$ &$p^*$ & $v_1$ & $v_1$ &
 \\
                & buyer payoff & $p_0-p^*$ & $p_1-p^*$ & $p_1-p^*$ & 0 & 0 &
$\alpha g_s f_b (p_1 - p^*)$ \\ 
 (Seller discloses, & seller payoff & $p^*-v_0$
& $p^*-v_1$ & $p^*-v_1$ & 0 & 0 & $(1-\alpha) b_0 + \alpha g_s
b_1-\alpha g_s f_b (p_1 - p^*)$ \\
  Buyer silent) & total & $b_0$ & $b_1$ & $b_1$ & 0 & 0 &\framebox{
 $(1-\alpha) b_0 + \alpha g_s b_1 $}\\ 
        \multicolumn{2}{c}{ } & \multicolumn{5}{|c|}{ } & \\
          \hline
\multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
 {\bf Mutual mistake} & Price & $p_0$ & $p_0$&$p_0$& $v_1$ & $v_1$ &
 \\
                & buyer payoff & 0 & 0 & $p_1 - p_0$ & 0 & 0 & $\alpha g_s
f_b ( v_0 - p_0 )$ \\
 (Seller discloses, & seller payoff & $b_0$ & $-L$ & $p_0
- v_1$ & 0& 0 & $(1-\alpha) b_0 + \alpha g_s f_b (p_0-v_1)- \alpha
g_s g_b L$ \\ 
       Buyer silent) & total & $b_0$ & $-L$ & $b_1$ & 0 & 0 & \framebox{
$(1-\alpha) b_0 + \alpha g_s f_b b_1 -\alpha g_s g_b L$ }\\ 
        \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
 \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\  
       \hline 
  \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\  
 {\bf Unilateral mistake} & Price & $p_0$ & $p_0$&$p_0$
& $v_1$ & $v_1$ & \\
                & buyer payoff & 0 & 0 & 0 & 0 & 0 & 0\\ 
               (Seller discloses, &
seller payoff & $b_0$& $-L$ & 0 & 0 & 0 & $(1-\alpha) b_0 - \alpha g_s g_b L
$\\ 
  Buyer discloses) & total & $b_0$ & $-L$ & 0 & 0 & 0 & \framebox{$(1-\alpha)
b_0 - \alpha g_s g_b L $}\\ 
  \multicolumn{2}{c}{ } &       \multicolumn{5}{|c|}{ } &  \\   
      \hline
              \hline
 \multicolumn{8}{c}{  }\\
  \multicolumn{8}{c}{ \bf TABLE 1:    GAINS FROM TRADE IN MODEL I}\\
           \end{tabular}
\end{center}
 
\end{tiny}

 \newpage

\begin{center}
\begin{tabular}{ |l|l|l|l|}
 \hline
  Rule &    Low $c_s$  & (Low $c_b$, High $c_s$)  & (High $c_b$, High $c_s$)\\
 \hline
    &       &    &  \\
 No Excuse & $  (1-\alpha)b_0-c_s$ &  $(1-\alpha)b_0 - \left(
\frac{v_1-p_0}{v_1-p^*} \right) c_b$   & \framebox{$(1-\alpha)b_0 $}\\
  &       &    &  \\
  Unilateral Mistake &\framebox{$ (1-\alpha)b_0-\alpha L$ }& \framebox{$
(1-\alpha)b_0-\alpha L$} & $ (1-\alpha)b_0- \alpha L$\\
  &       &    &  \\
 Mutual Mistake & $ (1-\alpha)b_0 -c_s$ & $ (1-\alpha)b_0 -c_b$ & $
(1-\alpha)b_0 - \alpha L$\\
 &       &    &  \\
   \hline
  \multicolumn{4}{c}{ }\\
 \multicolumn{4}{c}{   TABLE 2: SURPLUS  IN MODEL II}\\
 \multicolumn{4}{c}{ (the largest column entries given $Min
\{c_b,c_s\}> \alpha L$ are boxed)}\\
              \end{tabular}
\end{center}

\newpage

    \begin{center}
\begin{tabular}{ |l ll|}
 \hline
  Rule &  Seller &  Buyer\\
 \hline
 \multicolumn{3} {|c|}{ }\\
 No excuse & $(V, p_1, p_1)$    &  $(0, V-p_1, V-p_1)$\\
 \multicolumn{3}{|c|}{ }\\
 Unilateral mistake & $(V, V,\; V-L)$   & $(0, 0,\;\;\; 0\;\;\;) $\\
  \multicolumn{3}{|c|}{ }\\
 Mutual mistake &  $(V, p_1, V-L)$   & $(0, V-p_1, 0)$\\
  \multicolumn{3}{|c|}{ }\\
 \hline
  \multicolumn{3}{c}{ }\\
 \multicolumn{3}{c}{   TABLE 3: GAMBLES IN MODEL III}\\
   \multicolumn{3}{c}{(Payoffs under no mistake, unilateral, or
mutual) }\\
          \end{tabular}
\end{center}


\newpage

\begin{center}
  
\begin{tabular}{rcccc}
                   &        &\multicolumn{3}{c}{\bf Buyer }\\
                   &        &  Informed  &  &  Uninformed \\     
         & Informed& $p^* -c_s, -c_b$ &$\rightarrow$ & $p^*-c_s, 0$ \\
 {\bf Seller}  &  &  $\uparrow$    &          &  $\downarrow$    \\
 & Uninformed & $p_0,\alpha(v_1 -p_0) -c_b$ & $\leftarrow$
& $p^* - \alpha L ,0$ \\
 \multicolumn{5}{l}{ }\\
 \multicolumn{5}{l}{ TABLE  4: PAYOFFS UNDER THE MUTUAL MISTAKE  RULE  }\\
    \multicolumn{5}{l}{\it Payoffs to: Seller, Buyer.}
  \end{tabular}
\end{center}


  \newpage

 AUTHOR INFORMATION. 
 
        \vskip 1.0in
\noindent
 \hspace*{ 12pt}Rasmusen: Indiana University School of Business, 10th and Fee
Lane, Bloomington, Indiana 47405. (812) 855-3345. Fax: 812-855-8679.  Internet:
erasmuse@ucs.indiana.edu.    \\

From December 15 to January 10, Rasmusen may or may not be out of town. You should
call before mailing any proofs. Over Christmas he will be at: (815)498-3154 4517
E.  23rd Rd.  Leland, Ill. 60531. During the first part of January, he will be at
the AEA meetings in Anaheim, California.  The hotel telelphone number is (714)
750-4321 (Anaheim Hilton). He may be very hard to reach, and will not be at the
hotel the entire time.




 Ayres:  Stanford Law School, Stanford, Cal. 94305-8610. (415) 723-0145.
Fax: (415) 725-0253. RG.IAN@STANFORD.BITNET. \\



  File:/me/AAOctober/99mistake.te.  Draft: 7.1 (Draft 1.1, August
1991).  \\
 
  
 
 
\newpage
\bigskip
\noindent
 {\bf References}

 WE INCLUDE THESE BECAUSE WE ALREADY HAVE THEM PUT TOGETHER, AND THEY MIGHT BE
HELPFUL IN EDITING. ALSO,  IF YOU HAVE EXTRA SPACE IN THE ISSUE, YOU MIGHT WANT TO
INCLUDE BIBLIOGRAPHIES WITH THE ARTICLES.
 
 Ayres and Gertner (1992) ``Strategic Contractual Inefficiency and
the Optimal Choice of Legal Rules,'' 101 {\it Yale L. J.} 729.

Birmingham, Robert (1987) ``A Rose by Any Other Word: Mutual Mistake
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Law Review} 197-226.
 
Cicero, {\it Selected Works}, Harmondsworth, England: Penguin Books, 1984.   
 
 Cooter, Robert (1985) ``Unity in Tort, Contract, and Property: The
Model of Precaution,'' 73 {\it California Law Review} 1.
 
Cooter, Robert and Thomas Ulen (1988) {\it Law and Economics},
Glenview, Illinois: Scott, Foresman, 1988.
 
    
Craswell, Richard (1989a) ``Precontractual Investigation as an
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401-436.
 
Craswell, Richard (1989b) ``Contract Law, Default Rules, and the
Philosophy of Promising,'' 88 {\it Michigan Law Review} 489.
 
Farnsworth, E. Allen (1990) {\it Farnsworth on Contracts}, Boston:
Little, Brown and Company.
 
 Fried, Charles (1981) {\it Contract as Promise: A Theory of
Contractual Obligation}, Cambridge, Mass.: Harvard University Press.
 
Gergen, Mark (1990) ``Liability for Mistake in Contract Formation,''
64 {\it Southern California Law Review}, 1-49.
 
 
  Goldberg, Victor (1988) ``Impossibility and Related Excuses,'' 144
{\it Journal of International \& Theoretical Econ.} 100.
 
Joskow, Paul (1977) ``Commercial Impossibility: The Uranium Market
and the Westinghouse Case,'' 6 {\it Journal of Legal Studies } 119.


Kenney, Roy W. and Klein, Benjamin  (1983) ``The Economics of Block
Booking,''{\it Journal of Law and Economics}, October 1983, {\it 26},
497-540.  

 Kronman, Anthony (1978) ``Mistake, Disclosure, and the Law of
Contracts,'' 7 {\it Journal of Legal Studies} 1.
  

  Kull, Andrew  (1991) ``Mistake, Frustration, and the Windfall
Principle of Contract Remedies,'' 43 {\it Hastings L. J.} 1.  
   
 Kull, Andrew (1992) ``Unilateral Mistake:  The Baseball Card Case,'' 70 {\it
Washington
University Law Quarterly} 57. 

Macaulay, Stewart (1963) ``Non-Contractual Relations in Business: A
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McDougal, Myres (1931) ``Collateral Mistake and the Duty to Disclose,''
June 1931, Yale Law School unpublished paper. 

 
    
 Mueller, Addison and Arthur
Rosett (1977) {\it Contract Law and its Application},  Second Edition.
 
Posner, Richard (1986) {\it Economic Analysis of the Law}, 3rd
Edition, Boston: Little Brown and Company, 1986.
 
 Posner, Richard \& Andrew Rosenfield (1977) ``Impossibility and
Related Rules in Contract Law: An Economic Analysis,'' 6 {\it Journal
of Legal Studies} 83.

 Rothschild, Michael and Joseph Stiglitz (1970) ``Increasing risk I: A
definition,''   2 {\it J. Econ. Theory} 225-243. 
 
Shavell, Steven (1991) ``Acquisition and Disclosure of Information
Prior to Economic Exchange,'' working paper, Harvard Law School.
 
 
Smith, Janet and Richard Smith
 (1990) ``Contract Law, Mutual Mistake, and Incentives to Produce and
Disclose Information,''  19 {\it Journal of Legal Studies}  467-488.
 
Sykes, Alan (1990) ``The Rule of Commercial Impracticability in a
Second-Best World,''  19 {\it Journal of   Legal Studies} 43.
 
White, Michelle (1988) "Contract Breach and Contract Discharge Due to
Impossibility:  A
Unified Theory," 17 {\it J. Legal Studies} 353.


 

  
 \end{document}


