Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing-liability contract. To implement such a contract, we recommend deducting past expenditures on incomplete performance from liability. We show that some types of progress-payment contracts are materially equivalent to decreasing-liability contracts. Our analysis should prove useful for elucidating progress-payment contracts and for drafting and litigating phased contracts.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- A. Mitchell Polinsky & Yeon-Koo Che, 1991.
"Decoupling Liability: Optimal Incentives for Care and Litigation,"
NBER Working Papers
3634, National Bureau of Economic Research, Inc.
- A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
- Yeon-Koo Che & Tai-Yeong Chung, 1999.
"Contract Damages and Cooperative Investments,"
RAND Journal of Economics,
The RAND Corporation, vol. 30(1), pages 84-105, Spring.
When requesting a correction, please mention this item's handle: RePEc:ucp:jlstud:v:33:y:2004:p:157-197. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If references are entirely missing, you can add them using this form.