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Commitment Through Specific Investment in Contractual Relationships

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  • Chung, T.-Y.

Abstract

The effectiveness of stipulated damages in inefficiently excluding competitors can be undermined by the penalty doctrine and by the possibility of renegotiation. Recent works show that investment by the breached-against party can restore the effectiveness of stipulated damages. The authors investigate a model in which the breaching party makes a specific investment and show that (1) the breaching party's overinvestment can be an effective commitment device without need to use stipulated damages, (2) the commitment through overinvestment does not suffer from the penalty doctrine nor from the possibility of renegotiation, and (3) the availability of stipulated damages creates no additional effect.
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Suggested Citation

  • Chung, T.-Y., 1994. "Commitment Through Specific Investment in Contractual Relationships," University of Western Ontario, Departmental Research Report Series 9420, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:9420
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    File URL: https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1439&context=economicsresrpt
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    Cited by:

    1. Vincenzo Scoppa, 2003. "The Role of Turnover Costs in the Enforcement of Performance–Related Pay Contracts," Metroeconomica, Wiley Blackwell, vol. 54(1), pages 60-78, February.

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