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Incomplete Contracts and Breach Remedies

Author

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  • Shingo Ishiguro

Abstract

This paper investigates what legal rules for breach of contracts can support the efficiency in a principal-agent relationship when complete contracts cannot be written ex ante and the agent chooses unobservable effort in advance of trade. We examine both specific performance and expectation damage as standard breach remedies and show the following: Even if ex ante contracts can be written with specific performance, in general the first-best effort cannot be implemented; on the other hand, when expectation damage is awarded as a breach remedy, there exists a perfect Bayesian equilibrium which achieves the first best under general conditions.

Suggested Citation

  • Shingo Ishiguro, 1999. "Incomplete Contracts and Breach Remedies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(2), pages 342-342, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199906)155:2_342:icabr_2.0.tx_2-9
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    Cited by:

    1. Manuel Willington, 2013. "Hold Up Under Costly Litigation and Imperfect Courts of Law," Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(5), pages 1023-1055, October.
    2. Arshad Ali Javed & Patrick T.I. Lam & Albert P.C. Chan, 2014. "Change negotiation in public-private partnership projects through output specifications: an experimental approach based on game theory," Construction Management and Economics, Taylor & Francis Journals, vol. 32(4), pages 323-348, April.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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