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Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

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  • Alexander Stremitzer

Abstract

When investments are nonverifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling "expectation damages" close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, to lower informational requirements of courts, parties may opt for a "specific performance" regime, which grants the breached-against buyer an option to choose "restitution" if the tender's value falls below some (arbitrarily chosen) quality threshold. To implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999. "Cooperative Investments and the Value of Contracting," 89 American Economic Review 125--47). (JEL K12, L22, J41, C70) The Author 2010. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Alexander Stremitzer, 2012. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(2), pages 337-359.
  • Handle: RePEc:oup:jleorg:v:28:y::i:2:p:337-359
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    File URL: http://hdl.handle.net/10.1093/jleo/ewq007
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    Cited by:

    1. Buzard, Kristy & Watson, Joel, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    2. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    3. Buzard, Kristy & Watson, Joel, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    4. Schweizer, Urs, 2016. "Efficient incentives from obligation law and the compensation principle," International Review of Law and Economics, Elsevier, vol. 45(C), pages 54-62.
    5. Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.
    6. Göller, Daniel & Stremitzer, Alexander, 2009. "Breach Remedies Including Hybrid Investments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 282, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    7. Agamirova, Maria Å. & Dzagurova, Nataliya B., 2016. "The Legality of Vertical Restraints by the Rule of Reason and the Character of the Specific Investments," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 122-137, December.
    8. Göller, Daniel & Stremitzer, Alexander, 2014. "Breach remedies inducing hybrid investments," International Review of Law and Economics, Elsevier, vol. 37(C), pages 26-38.
    9. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
    10. Christoph Engel & Lars Freund, 2017. "Behaviorally Efficient Remedies – An Experiment," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2017_17, Max Planck Institute for Research on Collective Goods.

    More about this item

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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