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How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts

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  • Patrick W Schmitz

Abstract

A buyer wants to purchase an innovative good from a seller. Both parties are risk-neutral, and payments from the buyer to the seller must be non-negative. After the contract is signed, the seller privately observes a signal which may be informative about the seller’s costs. We compare two contracting regimes. In the case of specific performance, the courts enforce the contractually specified trade level. In the case of at-will contracting, the seller is free to walk away from the contract after observing the signal. The optimal regime from an economic efficiency point-of-view depends on the informativeness of the signal.

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  • Patrick W Schmitz, 2022. "How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2563-2577.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:647:p:2563-2577.
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    1. Schmitz, Patrick W., 2023. "Incentivizing research with (un)conditional teaching duties: Punishment or rent extraction?," Economics Letters, Elsevier, vol. 224(C).
    2. Francesco Giovannoni & Toomas Hinnosaar, 2022. "Pricing Novel Goods," Papers 2208.04985, arXiv.org.

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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