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Precontractual Reliance

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  • Bebchuk, Lucian Arye
  • Ben-Shahar, Omri

Abstract

During contractual negotiations, parties often make reliance expenditures that would increase the surplus should a contract be made. This paper analyzes decisions to invest in precontractual reliance under alternative legal regimes. Investments in reliance will be socially suboptimal in the absence of any precontractual liability and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how "intermediate"-liability rules could be best designed to induce efficient reliance decisions. One of our results indicates that the case for liability is shown to be stronger when a party retracts from terms that it has proposed or from preliminary understandings reached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that precontractual liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations. Copyright 2001 by the University of Chicago.

Suggested Citation

  • Bebchuk, Lucian Arye & Ben-Shahar, Omri, 2001. "Precontractual Reliance," The Journal of Legal Studies, University of Chicago Press, vol. 30(2), pages 423-457, Part I Ju.
  • Handle: RePEc:ucp:jlstud:v:30:y:2001:i:2:p:423-57
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    File URL: http://dx.doi.org/10.1086/322057
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    References listed on IDEAS

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    1. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-1093, Nov.-Dec..
    2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    3. Laurence R. Iannaccone, 1998. "Introduction to the Economics of Religion," Journal of Economic Literature, American Economic Association, pages 1465-1495.
    4. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, pages 675-700.
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    Cited by:

    1. Jacobi, Osnat & Weiss, Avi, 2013. "Allocation of fault in contract law," International Review of Law and Economics, Elsevier, vol. 36(C), pages 1-11.
    2. A. Mitchell Polinsky & Steven Shavell, 2005. "Economic Analysis of Law," Discussion Papers 05-005, Stanford Institute for Economic Policy Research.
    3. Steven Shavell, 2003. "Economic Analysis of Contract Law," NBER Working Papers 9696, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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