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Expectation Damages and Bilateral Cooperative Investments

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  • Göller, Daniel
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    Abstract

    We examine the efficiency of the standard breach remedy expectation damages in a setting of bilateral cooperative investment by a buyer and a seller. Contracts may specify a required quality level and an upper bound to the cost of production. We find that it is optimal to write an augmented Cadillac contract that sets one threshold such that it cannot be met with positive probability together with an extreme price. Then, one of the parties becomes a residual claimant of the trade relationship. The other threshold can be used to balance the incentives of the other party. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62047.

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    Date of creation: 2012
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    Handle: RePEc:zbw:vfsc12:62047

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    1. Alexander Stremitzer, 2009. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Bonn Econ Discussion Papers, University of Bonn, Germany bgse4_2009, University of Bonn, Germany.
    2. Asanuma, Banri, 1989. "Manufacturer-supplier relationships in Japan and the concept of relation-specific skill," Journal of the Japanese and International Economies, Elsevier, vol. 3(1), pages 1-30, March.
    3. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 125-147, March.
    4. Susanne Ohlendorf, 2009. "Expectation Damages, Divisible Contracts, and Bilateral Investment," American Economic Review, American Economic Association, American Economic Association, vol. 99(4), pages 1608-18, September.
    5. Shavell, Steven, 1984. "The Design of Contracts and Remedies for Breach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(1), pages 121-48, February.
    6. Goller, Daniel & Stremitzer, Alexander, 2009. "Breach Remedies Inducing Hybrid Investments," Working Papers 72, Yale University, Department of Economics.
    7. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    8. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 478-501, June.
    9. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
    10. Urs Schweizer, 2006. "Cooperative investments induced by contract law," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 134-145, 03.
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