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

Patrick Schmitz

No 17109, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Contract theory; Specific performance; At-will contracts; Asymmetric information; Ex-post inefficiencies (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 H57 K12 L14 (search for similar items in EconPapers)
Date: 2022-03
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Journal Article: How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts (2022)
Working Paper: How (Not) to Purchase Novel Goods and Services: Specific Performance Versus At-Will Contracts (2022)
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