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Holdups, Standard Breach Remedies, and Optimal Investment

  • Edlin, Aaron S
  • Reichelstein, Stefan

In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. The authors postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed. They find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems. Copyright 1996 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 86 (1996)
Issue (Month): 3 (June)
Pages: 478-501

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Handle: RePEc:aea:aecrev:v:86:y:1996:i:3:p:478-501
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  17. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  18. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
  19. J. O. N. Perkins, 1977. "Comment," Economic Papers, The Economic Society of Australia, vol. 1(56), pages 35-35, October.
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  23. Lars Stole & Jeffrey Zwiebel, 1993. "Organizational Design and Technology Choice with Nonbinding Contracts," Game Theory and Information 9310001, EconWPA, revised 13 Oct 1993.
  24. 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.
  25. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
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