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Breach Remedies Inducing Hybrid Investments

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  • Goller, Daniel

    (University of Bonn)

  • Stremitzer, Alexander

    (Yale University and University of Bonn)

Abstract

We show that parties in bilateral trade can rely on the default common law breach remedy of 'expectation damages' to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a sufficiently high quality level. In contrast, the result by Che and Chung (1999) that 'reliance damages' induce the first best in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality specified in the contract is too low, 'expectation damages' do not necessarily induce the ex-post efficient trade decision in the presence of cooperative investments.

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Bibliographic Info

Paper provided by Yale University, Department of Economics in its series Working Papers with number 72.

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Date of creation: Oct 2009
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Handle: RePEc:ecl:yaleco:72

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Cited by:
  1. Göller, Daniel, 2012. "Expectation Damages and Bilateral Cooperative Investments," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62047, Verein für Socialpolitik / German Economic Association.

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