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Contract Remedies and Options Pricing

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  • Mahoney, Paul G

Abstract

This article examines the choice between money damages and specific performance as the remedy for contract breach by drawing on the theory of options valuation. The ability to breach and pay money damages is analogous to granting the breaching party an option to buy back his performance for a strike price equal to the damages award. The option affects the parties' returns from the contract and the variance of those returns. The parties' ex ante preference for money damages or specific performance should therefore depend, among other things, on their ability to value the option and their attitudes toward risk. The article examines the parties' ability to determine the option value and the effects of that value on their preferences under various assumptions. It concludes that the options analogy helps to explain the common law's choice of money damages as the normal remedy and the most common exceptions. Copyright 1995 by the University of Chicago.

Suggested Citation

  • Mahoney, Paul G, 1995. "Contract Remedies and Options Pricing," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 139-163, January.
    • Handle: RePEc:ucp:jlstud:v:24:y:1995:i:1:p:139-63
    DOI: 10.1086/467955
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    Cited by:

    1. Camille Chaserant, 2007. "Autorité et flexibilité : quand la théorie des options interroge," Working Papers hal-04139207, HAL.
    2. Jacobi Osnat & Sher Noam, 2015. "A Commitment Mechanism to Eliminate Willful Contract Litigation," Review of Law & Economics, De Gruyter, vol. 11(2), pages 231-266, July.
    3. Zervogianni, Eleni, 2004. "Remedies for damage to property: money damages or restitution in natura?," International Review of Law and Economics, Elsevier, vol. 24(4), pages 525-541, December.
    4. Triantis, Alexander J & Triantis, George G, 1998. "Timing Problems in Contract Breach Decisions," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 163-207, April.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    6. Tai-Yeong Chung & Alan Chan, 2004. "Contract Damages and Investment Dynamics," Econometric Society 2004 Far Eastern Meetings 683, Econometric Society.
    7. Elli Kraizberg & Moshe Arenst, 2000. "Efficient Contract Remedies And the European Unification," European Journal of Law and Economics, Springer, vol. 10(1), pages 93-112, July.

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