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Breach Remedies Including Hybrid Investments

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  • Göller, Daniel
  • Stremitzer, Alexander

Abstract

We show that parties in bilateral trade can rely on the default common law breach remedy of ‘expectation damages’ to induce simultaneously ?rst-best relationship-speci?c investments of both the sel?sh and the cooperative kind. This can be achieved by writing a contract that speci?es a suffciently high quality level. In contrast, the result by Che and Chung (1999) that ‘reliance damages’ induce the ?rstbest in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality speci?ed in the contract is too low, ‘expectation damages’ do not necessarily induce the ex-post effcient trade decision in the presence of cooperative investments.

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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 282.

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Date of creation: Oct 2009
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Handle: RePEc:trf:wpaper:282

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Keywords: breach remedies; incomplete contracts; hybrid investments; cooperative investments; sel?sh investments;

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References

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  1. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September.
  2. Alexander Stremitzer, 2012. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Journal of Law, Economics and Organization, Oxford University Press, vol. 28(2), pages 337-359.
  3. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  4. Che, Y.K. & Hausch, D.B., 1997. "Cooperative Investments and the Value of Contracting," Working papers 9714, Wisconsin Madison - Social Systems.
  5. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  6. Che, Y.K. & Chung, Y.T., 1996. "Contract Damages and Cooperative Investments," UWO Department of Economics Working Papers 9612, University of Western Ontario, Department of Economics.
  7. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  8. Rosenkranz, Stephanie & Schmitz, Patrick W., 1999. "Know-how disclosure and incomplete contracts," Economics Letters, Elsevier, vol. 63(2), pages 181-185, May.
  9. Watson, Joel, 2002. "Contract, Mechanism Design, and Technological Detail," University of California at San Diego, Economics Working Paper Series qt18x0r2nn, Department of Economics, UC San Diego.
  10. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
  11. De Fraja, Gianni, 1999. "After You Sir. Hold-Up, Direct Externalities, and Sequential Investment," Games and Economic Behavior, Elsevier, vol. 26(1), pages 22-39, January.
  12. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
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  14. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  15. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
  16. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  17. Urs Schweizer, 2006. "Cooperative investments induced by contract law," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 134-145, 03.
  18. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
  19. Andreas Roider, 2002. "Asset Ownership and Contractability of Interaction," Bonn Econ Discussion Papers bgse12_2002, University of Bonn, Germany, revised May 2003.
  20. Aaron S. Edlin, 1994. "Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages," NBER Working Papers 4915, National Bureau of Economic Research, Inc.
  21. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
  22. Thomas P. Lyon & Eric Rasmusen, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Working Papers 2004-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  23. Ilya Segal & Michael D. Whinston, 2002. "The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)," Econometrica, Econometric Society, vol. 70(1), pages 1-45, January.
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