Susanne Ohlendorf () (University of Bonn, Wirtschaftspolitische Abteilung, Adenauer Alle 24-42, 53113 Bonn, Germany, email: susanne.ohlendorf@uni-bonn.de.)
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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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number
231.
Find related papers by JEL classification: K12 - Law and Economics - - Basic Areas of Law - - - Contract Law D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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