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Commitment Through Specific Investment in Contractual Relationships

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Author Info
Tai-Yeong Chung

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Abstract

The effectiveness of stipulated damages in inefficiently excluding competitors can be undermined by the penalty doctrine and by the possibility of renegotiation. Recent works show that investment by the breached-against party can restore the effectiveness of stipulated damages. The authors investigate a model in which the breaching party makes a specific investment and show that (1) the breaching party's overinvestment can be an effective commitment device without need to use stipulated damages, (2) the commitment through overinvestment does not suffer from the penalty doctrine nor from the possibility of renegotiation, and (3) the availability of stipulated damages creates no additional effect.

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File URL: http://economics.ca/cgi/xms?jab=v31n5/03.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 31 (1998)
Issue (Month): 5 (November)
Pages: 1057-1075
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Handle: RePEc:cje:issued:v:31:y:1998:i:5:p:1057-1075

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This page was last updated on 2009-12-21.

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