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Reliance Investments, Expectation Damages and Hidden Information

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  • Schweizer, Urs
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    Abstract

    A setting of reliance investments is explored where one of the parties to a contract obtains private information concerning his utility or cost function that remains hidden to the other party and to courts. As a consequence, it will be a difficult task to award expectation damages corrrectly to a party with private information who sufffers from breach of contract. While a revelation mechanism would exist that leads to the first best solution, assessing expectation damages correctly turns out to be at odds with ex post efficiency. I conclude that, under asymmetric information, the performance of expectation damages falls short of what more general mechanisms could achieve.

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    File URL: http://epub.ub.uni-muenchen.de/13389/1/162.pdf
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    Bibliographic Info

    Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 162.

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    Date of creation: Sep 2006
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    Handle: RePEc:trf:wpaper:162

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    Keywords: reliance investments; expectation damages; breach of contract; hidden information;

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    1. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
    2. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Schweizer, Urs, 2005. "Law and Economics of Obligations," International Review of Law and Economics, Elsevier, Elsevier, vol. 25(2), pages 209-228, June.
    4. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
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