Holdups, Standard Breach Remedies, and Optimal Investment

Aaron Edlin () and Stefan Reichelstein

American Economic Review, 1996, vol. 86, issue 3, 478-501

Abstract: In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. The authors 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. They 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. Copyright 1996 by American Economic Association.

Date: 1996
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