Governmental liability for breach of contract

Government contracts are subject to a number of legal rulesthat have no private sector analogues and that have receivedvirtually no attention from law and economics scholar. Thisarticle explores these rules from an economic perspective, withspecial attention to the leading modern case on the subject,United States v. Winstar. The analysis emphasizes a number ofdifferences between governmental and private actors that haveimportant implications for the wisdom of applying conventionalbreach of contract remedies to the government. These differencesafford plausible efficiency justifications, in our view, formany of the most important doctrines governing government contracts.Some of these doctrines help to impede the use of long-termcontracts to insulate inefficient rent-seeking arrangementsagainst subsequent attack, some seem to prevent the governmentfrom inefficiently contracting away its ability to respond tonew information, and others seem to work a sensible allocationbetween the government and private contractors of the risk thatgovernment may change its policies. Not all doctrines and decisionscan be justified in this fashion, however, and we do not meanto claim that the existing body of law is in any sense optimal.Indeed, the Winstar decision itself seems quite mistaken froman economic standpoint. The considerations that we develop haveimplications for a number of related legal issues. Not all ofthese implications are developed here, but we do consider modernlitigation under the Contract Clause of the U.S. Constitutionas well as the recent academic debate about the wisdom of retroactivetaxation.