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Efficient Contracting with Reliance and a Damage Measure

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  • Akira Konakayama
  • Toshihide Mitsui
  • Shinichi Watanabe
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    Abstract

    This article reexamines the problem of breach of contract studied by Shavell (1980, 1984) and Rogerson (1984) by considering explicitly the incentive problems that arise from asymmetric information and transaction-specific investment. We derive the optimal contract, which consists of variable price and damage payment schedules, each of which is set before any private information is observed. We show that the optimal contract attains full classical efficiency.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 17 (1986)
    Issue (Month): 3 (Autumn)
    Pages: 450-457

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    Handle: RePEc:rje:randje:v:17:y:1986:i:autumn:p:450-457

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    Cited by:
    1. William P. Rogerson, 1990. "Contractual Solutions to the Hold-Up Problem," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 873, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
    3. Hori, Kazumi, 2005. "Inefficiency in a Bilateral Trading Problem with Cooperative Investment," Discussion Papers, Graduate School of Economics, Hitotsubashi University 2005-02, Graduate School of Economics, Hitotsubashi University.
    4. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    5. Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers, Kyoto University, Institute of Economic Research 888, Kyoto University, Institute of Economic Research.
    6. Schmitz, Patrick W., 2009. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7584, C.E.P.R. Discussion Papers.
    7. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, Elsevier, vol. 103(2), pages 444-460, April.
    8. Roig, Guillem, 2014. "What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co," TSE Working Papers, Toulouse School of Economics (TSE) 14-482, Toulouse School of Economics (TSE).
    9. Sugata Bag, 2010. "Whither Contract Damages: Contracts with Bilateral Reliance, One-sided Private Information," REVISTA DE LA MAESTRIA DE DERECHO ECONÓMICO, UNIVERSIDAD JAVERIANA - DERECHO ECONOMICO, UNIVERSIDAD JAVERIANA - DERECHO ECONOMICO.
    10. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, Elsevier, vol. 46(1), pages 169-188, January.
    11. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 478-501, June.
    12. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.
    13. Zhao, Rui R., 2008. "Rigidity in bilateral trade with holdup," Theoretical Economics, Econometric Society, Econometric Society, vol. 3(1), March.

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