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Expectation Damages, Divisible Contracts, and Bilateral Investment

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  • Ohlendorf, Susanne

Abstract

This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract.

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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 231.

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Date of creation: Mar 2008
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Handle: RePEc:trf:wpaper:231

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Keywords: breach remedies; renegotiation; hold-up;

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Cited by:
  1. Goller, Daniel & Stremitzer, Alexander, 2009. "Breach Remedies Inducing Hybrid Investments," Working Papers 72, Yale University, Department of Economics.
  2. Schmitz, Patrick W, 2012. "Incomplete contracts and optimal ownership of public goods," CEPR Discussion Papers 9141, C.E.P.R. Discussion Papers.
  3. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
  4. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
  5. Schmitz, Patrick W, 2013. "Bargaining position, bargaining power, and the property rights approach," CEPR Discussion Papers 9281, C.E.P.R. Discussion Papers.
  6. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
  7. Bragelien, Iver & Impink, Joost, 2014. "Relationship-Specificity, Bargaining Power Growth, and Firm Performance," Discussion Papers 2014/4, Department of Business and Management Science, Norwegian School of Economics.
  8. 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.
  9. Kranz, Sebastian, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80047, Verein für Socialpolitik / German Economic Association.

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