Expectation Damages, Divisible Contracts, and Bilateral Investment

Arbeitspapier

We consider a bilateral trade setting with costless renegotiation and investment by both the buyer and the seller. Whether first best levels of relationship-specific investment can be induced by a simple contract depends on available breach remedies. As demonstrated by Edlin and Reichelstein (1996), a contract specifying an up-front transfer, a quantity and a per-unit price is in general not able to achieve the first best when the breach remedy is expectation damages. We show that this result is due to the linearity of the cost function in their counterexample, and does not extend beyond the linear case. If marginal cost is increasing, then at intermediate prices both parties face the risk of breaching, and the first best becomes attainable.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bonn Econ Discussion Papers ; No. 25/2006

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; Contract Law ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: expectation damages ; breach remedies ; renegotiation ; hold-up

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ohlendorf, Susanne
• Event: Veröffentlichung
• (who): University of Bonn, Bonn Graduate School of Economics (BGSE)
• (where): Bonn
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/22970
• Last update: 10.03.2025, 11:43 AM CET