 Efficient Material Breach of ContractThe Journal of Law, Economics, and Organization, 2017, vol. 33, issue 3, 507-540 Abstract: In an environment in which sellers can reduce the probability of defective delivery through cooperative investment, and in which enforcement of default remedies for breach of contract is imperfect, an optimal performance standard grants buyers the option to reject goods for some but not all defects, in other words, when the delivery is sufficiently defective and the seller is said to be in “material breach” of contract. This optimal performance standard implements efficient cooperative investment more often under a policy that, in addition, allows buyers to collect compensation for nondelivery of the good (upon rightful rejection) than a policy that limits buyers’ compensation to the recovery of the price. Although contracts with liquidated damages (i.e. a customized compensation function) can solve the investment problem as long as court enforcement is not too imperfect (in which case optimal liquidated damages are excessive and likely not enforced), the doctrine of material breach with an option to reject performs well as a default rule. JEL-codes: D86 K12 K41 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:jleorg:v:33:y:2017:i:3:p:507-540. Ordering information: This journal article can be ordered from Access Statistics for this article The Journal of Law, Economics, and Organization is currently edited by Andrea Prat More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. |
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