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Commitment Through Specific Investment in Contractual Relationships


Author Info

  • Chung, T.Y.


The effectiveness of stipulated damages in inefficiently excluding competitors can be undermined by the penalty doctrine and by the possibility of renegotiation. Recent works show that investment by the breached-against party can restore the effectiveness of stipulated damages. The authors investigate a model in which the breaching party makes a specific investment and show that (1) the breaching party's overinvestment can be an effective commitment device without need to use stipulated damages, (2) the commitment through overinvestment does not suffer from the penalty doctrine nor from the possibility of renegotiation, and (3) the availability of stipulated damages creates no additional effect.

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Bibliographic Info

Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 9420.

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Length: 30 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:uwo:uwowop:9420

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
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Keywords: investments ; contracts;

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