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.
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- 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.
- Che, Y.K. & Chung, Y.T., 1996. "Contract Damages and Cooperative Investments," UWO Department of Economics Working Papers 9612, University of Western Ontario, Department of Economics.
- 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.
- 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.
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