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Breach Remedies Inducing Hybrid Investments

Author

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  • Goller, Daniel

    (University of Bonn)

  • Stremitzer, Alexander

    (Yale University and University of Bonn)

Abstract

We show that parties in bilateral trade can rely on the default common law breach remedy of 'expectation damages' to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a sufficiently high quality level. In contrast, the result by Che and Chung (1999) that 'reliance damages' induce the first best in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality specified in the contract is too low, 'expectation damages' do not necessarily induce the ex-post efficient trade decision in the presence of cooperative investments.

Suggested Citation

  • Goller, Daniel & Stremitzer, Alexander, 2009. "Breach Remedies Inducing Hybrid Investments," Working Papers 72, Yale University, Department of Economics.
  • Handle: RePEc:ecl:yaleco:72
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    References listed on IDEAS

    as
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    Cited by:

    1. Daniel Göller, 2014. "Expectation Damages and Bilateral Cooperative Investments," American Law and Economics Review, Oxford University Press, vol. 16(2), pages 473-498.

    More about this item

    JEL classification:

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

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