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How (Not) to Purchase Novel Goods and Services: Specific Performance Versus At-Will Contracts

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  • Schmitz, Patrick W.

Abstract

A buyer wants to purchase an innovative good from a seller. Both parties are risk-neutral, and payments from the buyer to the seller must be non-negative. After the contract is signed, the seller privately observes a signal, which may be informative about the seller's costs. We compare two contracting regimes. In the case of specific performance, the courts enforce the trade level specified in the contract. In the case of at-will contracting, the seller is free to walk away from the contract after the signal has been realized. While the buyer prefers specific performance and the seller prefers at-will contracting, the optimal regime from an economic efficiency point-of-view depends on the informativeness of the signal.

Suggested Citation

  • Schmitz, Patrick W., 2022. "How (Not) to Purchase Novel Goods and Services: Specific Performance Versus At-Will Contracts," MPRA Paper 112839, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112839
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    Cited by:

    1. Schmitz, Patrick W., 2023. "Incentivizing research with (un)conditional teaching duties: Punishment or rent extraction?," Economics Letters, Elsevier, vol. 224(C).
    2. Francesco Giovannoni & Toomas Hinnosaar, 2022. "Pricing Novel Goods," Papers 2208.04985, arXiv.org, revised Aug 2024.

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    More about this item

    Keywords

    contract theory; specific performance; at-will contracts; asymmetric information; ex-post inefficiencies;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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