Post by Sapphire Capital on Dec 17, 2009 7:40:06 GMT 4
Breach Remedies Inducing Hybrid Investments
Alexander Stremitzer
Yale Law School; Yale University - Economics Department; University of Bonn - Economics Department
Daniel Goller
Bonn University
October 23, 2009
Yale Economics Department Working Paper No. 72
Yale Law & Economics Research Paper No. 395
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1491615_code254274.pdf?abstractid=1491615&mirid=1
Alexander Stremitzer
Yale Law School; Yale University - Economics Department; University of Bonn - Economics Department
Daniel Goller
Bonn University
October 23, 2009
Yale Economics Department Working Paper No. 72
Yale Law & Economics Research Paper No. 395
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1491615_code254274.pdf?abstractid=1491615&mirid=1