Dynamic Contract Breach

Fan Zhang

The Journal of Law, Economics, and Organization, 2011, vol. 27, issue 3, 453-484

Abstract: This article studies the design of optimal liquidated damages when breach of contract is possible at multiple points in time. It offers an intuitive explanation for why cancellation fees for some services (e.g., hotel reservations) increase as the time for performance approaches and discusses the incentives to mitigate damages. It is shown that absent externalities, privately stipulated damages induce socially efficient breach and investment decisions, regardless of whether renegotiation is possible. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2011
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