Expectation Damages, Divisible Contracts, and Bilateral Investment
AbstractThis paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract. (JEL D86, K12)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 99 (2009)
Issue (Month): 4 (September)
Other versions of this item:
- Ohlendorf, Susanne, 2008. "Expectation Damages, Divisible Contracts, and Bilateral Investment," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 231, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
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- Sebastian Kranz, 2013.
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- Göller, Daniel, 2012. "Expectation Damages and Bilateral Cooperative Investments," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62047, Verein für Socialpolitik / German Economic Association.
- Goldlücke, Susanne & Schmitz, Patrick W, 2011. "Investments as Signals of Outside Options," CEPR Discussion Papers 8366, C.E.P.R. Discussion Papers.
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