Incomplete Contracts and Breach Remedies
AbstractThis paper investigates what legal rules for breach of contracts can support the efficiency in a principal-agent relationship when complete contracts cannot be written ex ante and the agent chooses unobservable effort in advance of trade. We examine both specific performance and expectation damage as standard breach remedies and show the following: Even if ex ante contracts can be written with specific performance, in general the first-best effort cannot be implemented; on the other hand, when expectation damage is awarded as a breach remedy, there exists a perfect Bayesian equilibrium which achieves the first best under general conditions.
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Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.
Volume (Year): 155 (1999)
Issue (Month): 2 (June)
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
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- C. Manuel Willington, 2004.
"Hold-Up under Costly Litigation and Imperfect Courts of Law,"
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- C. Manuel Willington, . "Hold-Up under Costly Litigation and Imperfect Courts of Law," ILADES-Georgetown University Working Papers inv144, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
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