Expectation Damages, Divisible Contracts, and Bilateral Investment

Susanne Ohlendorf
Authors registered in the RePEc Author Service: Susanne Goldlücke

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract.

Keywords: breach remedies; renegotiation; hold-up (search for similar items in EconPapers)
JEL-codes: D86 K12 L14 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-bec and nep-law
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Expectation Damages, Divisible Contracts, and Bilateral Investment (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:231

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