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.
Item Type: | Paper |
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Keywords: | breach remedies, renegotiation, hold-up |
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 |
JEL Classification: | K12, D86, L14 |
URN: | urn:nbn:de:bvb:19-epub-13321-2 |
Language: | English |
Item ID: | 13321 |
Date Deposited: | 10. Jul 2012, 13:08 |
Last Modified: | 04. Nov 2020, 12:53 |