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Reliance Investments, Expectation Damages and Hidden Information

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  • Schweizer, Urs

Abstract

A setting of reliance investments is explored where one of the parties to a contract obtains private information concerning his utility or cost function that remains hidden to the other party and to courts. As a consequence, it will be a difficult task to award expectation damages corrrectly to a party with private information who sufffers from breach of contract. While a revelation mechanism would exist that leads to the first best solution, assessing expectation damages correctly turns out to be at odds with ex post efficiency. I conclude that, under asymmetric information, the performance of expectation damages falls short of what more general mechanisms could achieve.

Suggested Citation

  • Schweizer, Urs, 2006. "Reliance Investments, Expectation Damages and Hidden Information," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 162, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:162
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    File URL: https://epub.ub.uni-muenchen.de/13389/1/162.pdf
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    References listed on IDEAS

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    1. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
    2. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560, August.
    3. Schweizer, Urs, 2005. "Law and Economics of Obligations," International Review of Law and Economics, Elsevier, vol. 25(2), pages 209-228, June.
    4. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    5. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
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    Cited by:

    1. Sugata Bag, 2010. "Whither Contract Damages: Contracts with Bilateral Reliance, One-sided Private Information," Revista de la Maestría de Derecho Económico, Universidad Javeriana - Derecho Económico.

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    Keywords

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    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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