Expectation Damages, Divisible Contracts, and Bilateral Investment

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB/TR 15 Discussion Paper ; No. 231

Classification and Topics

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

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ohlendorf, Susanne
• Event: Veröffentlichung
• (who): Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY)
• (where): München
• (when): 2008

Further information

• DOI: doi:10.5282/ubm/epub.13321
• Handle: http://hdl.handle.net/10419/94047
• URN: urn:nbn:de:bvb:19-epub-13321-2
• Last update: 10.03.2025, 11:44 AM CET