Reliance Investments, Expectation Damages and Hidden Information

Schweizer, Urs (September 2006): Reliance Investments, Expectation Damages and Hidden Information. SFB/TR 15 Discussion Paper No. 162

Abstract

A setting of reliance investments is explored where one of the parties to a contract obtains private information concerning his utility or cost function that remains hidden to the other party and to courts. As a consequence, it will be a difficult task to award expectation damages corrrectly to a party with private information who sufffers from breach of contract. While a revelation mechanism would exist that leads to the first best solution, assessing expectation damages correctly turns out to be at odds with ex post efficiency. I conclude that, under asymmetric information, the performance of expectation damages falls short of what more general mechanisms could achieve.

• Item Type: Paper (Discussion Paper)
• Keywords: reliance investments, expectation damages, breach of contract, hidden information
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A5 - Unvollständige Vertragsbeziehungen und die Gestaltung von Residualrechten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: K12, D82
• Language: English