Holdups, Standard Breach Remedies, and Optimal Investment

Aaron Edlin () and Stefan Reichelstein

No 1155, Berkeley Olin Program in Law & Economics, Working Paper Series from Berkeley Olin Program in Law & Economics

Abstract: In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after information about the desirability of trade is revealed. We find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems. (forthcoming, The American Economic Review.) Please contact the Program in Law and Economics at Boalt Hall School of Law, UC Berkeley, Berkeley, CA 94720 for a copy of this paper.

Date: 1995-07-01
Note: oai:cdlib1:blewp-1155
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Working Paper: Holdups, Standard Breach Remedies, and Optimal Investment (1997)
Journal Article: Holdups, Standard Breach Remedies, and Optimal Investment (1996)
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