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Contract Damages and Investment Dynamics

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  • Tai-Yeong Chung
  • Alan Chan

Abstract

The present article provides an economic analysis to examine how contract damages affects both breach and investment decisions over time. Unlike the standard static model, this article studies a model in which, upon signing a contract, a seller invests over two periods, and a buyer may breach at the end of each period. The dynamic structure of the model allows us to investigate investment dynamics under alternative contract damages. First, under expectation damages, the seller has an incentive to invest only in the first period (front-loading of investment). Second, under reliance damages, a similar front-loading of investment occurs, and the degree of front-loading is excessive relative to the expectation damages. Third, under restitution damages, the seller has an incentive to invest only in the second period. We also examine efficiency properties of new hybrid measures of damages in which damages depend on the timing of breach.

Suggested Citation

  • Tai-Yeong Chung & Alan Chan, 2004. "Contract Damages and Investment Dynamics," Econometric Society 2004 Far Eastern Meetings 683, Econometric Society.
    • Handle: RePEc:ecm:feam04:683
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 115-138.
    2. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
    3. 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.
    4. Yeon-Koo Che & Tai-Yeong Chung, 1999. "Contract Damages and Cooperative Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 84-105, Spring.
    5. James Dearden & Dorothy Klotz, 1996. "Investment timing and efficiency in incomplete contracts," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 369-378, December.
    6. 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.
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    Cited by:

    1. Fan Zhang, 2008. "Dynamic Contract Breach," EAG Discussions Papers 200803, Department of Justice, Antitrust Division.
    2. Pilli-Sihvola, Karoliina & Aatola, Piia & Ollikainen, Markku & Tuomenvirta, Heikki, 2010. "Climate change and electricity consumption--Witnessing increasing or decreasing use and costs?," Energy Policy, Elsevier, vol. 38(5), pages 2409-2419, May.

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    More about this item

    Keywords

    Contract Damages; Investment Dynamics;

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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