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Breach remedies inducing hybrid investments

  • Göller, Daniel
  • Stremitzer, Alexander

We show that parties in bilateral trade can rely on the default common law breach remedy of ‘expectation damages’ to simultaneously induce first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a sufficiently high quality level. In contrast, the result by Che and Chung (1999) that ‘reliance damages’ induce the first best in a setting of purely cooperative investments, does not generalize to the hybrid case.

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File URL: http://www.sciencedirect.com/science/article/pii/S0144818813000495
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Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 37 (2014)
Issue (Month): C ()
Pages: 26-38

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Handle: RePEc:eee:irlaec:v:37:y:2014:i:c:p:26-38
DOI: 10.1016/j.irle.2013.06.005
Contact details of provider: Web page: http://www.elsevier.com/locate/irle

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  18. 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.
  19. Stremitzer, Alexander, 2008. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 242, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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  31. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
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