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Courts' Decisions, Cooperative Investments, and Incomplete Contracts

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  • Alessandro De Chiara

Abstract

Buyers may try to motivate their sellers to make relationship-specific investments to reduce the probability that the design of the goods they procure is defective. In some countries, courts examine how much real authority the seller had in performing the work to assign liability for a design failure. I show that this courts’ approach induces the sellers to under-invest and the buyers to under-specify the design of the goods. I find that this approach can also make it harder to sustain optimal relational contracting, leading to the conclusion that it cannot be justified on efficiency grounds.

Suggested Citation

  • Alessandro De Chiara, 2018. "Courts' Decisions, Cooperative Investments, and Incomplete Contracts," CEU Working Papers 2018_5, Department of Economics, Central European University.
    • Handle: RePEc:ceu:econwp:2018_5
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    More about this item

    Keywords

    Cooperative Investments; Courts; Defective Specifications; Design Failure; Expectation Damages; Formal and Real Authority; Incomplete Contracts; Relational Contracts. JEL classifications: D23; D86; K12; L23; L24.;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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