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Contract Damages and Cooperative Investments

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Author Info
Yeon-Koo Che
Tai-Yeong Chung

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Abstract

We study alternative breach remedies in the presence of specific investments that generate a direct benefit to the investor's trading partner (referred to as "cooperative investments."). We find that (i) expectation damages perform very poorly, inducing no cooperative investment; (ii) privately stipulated liquidated damages can achieve a better, albeit inefficient, outcome; and (iii) the reliance damages perform the best, achieving the efficient outcome if ex post renegotiation is possible. These rankings stand in contrast to those found in the existing literature, but they explain many observed contracting practices.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199921%2930%3A1%3C84%3ACDACI%3E2.0.CO%3B2-C&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 30 (1999)
Issue (Month): 1 (Spring)
Pages: 84-105
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Handle: RePEc:rje:randje:v:30:y:1999:i:spring:p:84-105

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  1. Aaron S. Edlin & Benjamin E. Hermalin, 1997. "Contract Renegotiation in Agency Problems," NBER Working Papers 6086, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Hege, U. & Viala, P., 1997. "Contentious contracts," Discussion Paper 109, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  3. Matthew J. Baker & Joyce P. Jacobsen, 2003. "A Human Capital-Based Theory of Post-Marital Residence Rules," Departmental Working Papers 2, United States Naval Academy Department of Economics. [Downloadable!]
    Other versions:
  4. Urs Schweizer, 2004. "Cooperative Investments Induced by Contract Law," Discussion Papers 10, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  5. Alexander Stremitzer, 2009. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Bonn Econ Discussion Papers bgse4_2009, University of Bonn, Germany. [Downloadable!]
    Other versions:
  6. Amihai Glazer & Stef Proost, 2008. "Signaling Commitment by Excessive Spending," Working Papers 070811, University of California-Irvine, Department of Economics. [Downloadable!]
  7. Matthew J. Baker, 2004. "Human Capital and Hold-ups in Indigenous Society: The Role of Customs and the Market," Departmental Working Papers 7, United States Naval Academy Department of Economics. [Downloadable!]
  8. Burguet, Roberto & Caminal, Ramón & Matutes, Carmen, 1999. "Golden Cages for Showy Birds: Optimal Switching Costs in Labour Markets," CEPR Discussion Papers 2070, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Charles North, 2001. "Remedies for misrepresentation in applications in the presence of fraudulent intent," Atlantic Economic Journal, International Atlantic Economic Society, vol. 29(2), pages 162-176, June. [Downloadable!] (restricted)
  10. C. Manuel Willington, 2004. "Hold-Up under Costly Litigation and Imperfect Courts of Law," Econometric Society 2004 Latin American Meetings 231, Econometric Society. [Downloadable!]
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  11. Urs Schweizer, . "Cooperative Investments Induced by Contract Law," German Working Papers in Law and Economics 2003-1-1078, Berkeley Electronic Press. [Downloadable!]
  12. Xinyu Hua, 2004. "Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs," Econometric Society 2004 North American Summer Meetings 564, Econometric Society. [Downloadable!]
  13. Yeon-Koo Che & Donald B. Hausch, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March. [Downloadable!] (restricted)
  14. Tai-Yeong Chung & Alan Chan, 2004. "Contract Damages and Investment Dynamics," Econometric Society 2004 Far Eastern Meetings 683, Econometric Society. [Downloadable!]
  15. Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization 0509007, EconWPA. [Downloadable!]
    Other versions:
  16. repec:att:wimass:19199812 is not listed on IDEAS
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