Breach Remedies Including Hybrid Investments

Göller, Daniel and Stremitzer, Alexander (October 2009): Breach Remedies Including Hybrid Investments. SFB/TR 15 Discussion Paper No. 282

Abstract

We show that parties in bilateral trade can rely on the default common law breach remedy of ‘expectation damages’ to induce simultaneously ?rst-best relationship-speci?c investments of both the sel?sh and the cooperative kind. This can be achieved by writing a contract that speci?es a suffciently high quality level. In contrast, the result by Che and Chung (1999) that ‘reliance damages’ induce the ?rstbest in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality speci?ed in the contract is too low, ‘expectation damages’ do not necessarily induce the ex-post effcient trade decision in the presence of cooperative investments.

• Item Type: Paper
• Keywords: breach remedies, incomplete contracts, hybrid investments, cooperative investments, sel?sh investments
• Faculties: 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
• Language: English