Standard Breach Remedies, Quality Thresholds, and Cooperative Investments
AbstractWhen investments are nonverifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling "expectation damages" close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, to lower informational requirements of courts, parties may opt for a "specific performance" regime, which grants the breached-against buyer an option to choose "restitution" if the tender's value falls below some (arbitrarily chosen) quality threshold. To implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999. "Cooperative Investments and the Value of Contracting," 89 American Economic Review 125--47). (JEL K12, L22, J41, C70) The Author 2010. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: firstname.lastname@example.org, Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal The Journal of Law, Economics, & Organization.
Volume (Year): 28 (2012)
Issue (Month): 2 ()
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Find related papers by JEL classification:
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
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