When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the default remedy of contract law induces the first best. Yet, in order to lower informational requirements of courts, parties may opt for a "specific performance" regime which grants the breached-against buyer an option to choose "restitution" if the tender’s value falls below some (exogenously given) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999).
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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
242.
Find related papers by JEL classification: K12 - Law and Economics - - Basic Areas of Law - - - Contract Law L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
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