Cadillac Contracts and Up-Front Payments: Efficient Investment under Expectation Damages

Aaron Edlin ()

The Journal of Law, Economics, and Organization, 1996, vol. 12, issue 1, 98-118

Abstract: This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980), by controlling which party breaches a contract. At the same time, "Cadillac" contracts (contracts for a very high quality or quantity) can protect against underinvestment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well-suited to multidimensional but one-sided investment problems, in contrast to specific performance, which is well-suited to two-sided but unidimensional investment problems. Copyright 1996 by Oxford University Press.

Date: 1996
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Working Paper: Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages (1994)
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