Incomplete Contracts and Breach Remedies
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.
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Volume (Year): 155 (1999)
Issue (Month): 2 (June)
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