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Efficient Contracting with Reliance and a Damage Measure

Author

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  • Akira Konakayama
  • Toshihide Mitsui
  • Shinichi Watanabe

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.

Suggested Citation

  • Akira Konakayama & Toshihide Mitsui & Shinichi Watanabe, 1986. "Efficient Contracting with Reliance and a Damage Measure," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 450-457, Autumn.
    • Handle: RePEc:rje:randje:v:17:y:1986:i:autumn:p:450-457
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    Cited by:

    1. Hori Kazumi, 2006. "Inefficiency in a Bilateral Trading Problem with Cooperative Investment," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-9, July.
    2. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 816-852.
    3. William P. Rogerson, 1990. "Contractual Solutions to the Hold-Up Problem," Discussion Papers 873, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
    5. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    6. 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, vol. 53(1), pages 1-17, January.
    7. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
    8. , R., 2008. "Rigidity in bilateral trade with holdup," Theoretical Economics, Econometric Society, vol. 3(1), March.
    9. Yossef Spiegel, 1996. "The Role of Debt in Procurement Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 379-407, September.
    10. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    11. Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers 888, Kyoto University, Institute of Economic Research.
    12. Sugata Bag, 2010. "Whither Contract Damages: Contracts with Bilateral Reliance, One-sided Private Information," Revista de la Maestría de Derecho Económico, Universidad Javeriana - Derecho Económico, December.

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