Optimal Remedies for Bilateral Contracts
University of Minnesota - Law School; University of Bologna
Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; University of St. Thomas School of Law
George Washington University - Department of Economics
September 28, 2010
Journal of Legal Studies, Forthcoming
Minnesota Legal Studies Research Paper No. 10-56
In several contract situations, parties exchange promises of future performance, creating reciprocal obligations. In this paper, we extend the standard models of contract remedies to consider the incentives created by contracts where both parties provide only executory consideration and where the parties’ obligations are yet to be performed. We show that the legal remedies that govern these contracts provide valuable enforcement mechanisms that are not available when parties enter into a contract where they exchange a promise for an actual performance. We show that when the values of the parties’ performances are interdependent, contracts with executory consideration create effort incentives that are superior to the incentives of contracts with executed consideration. In contracts with independent values, contracts with executory consideration also offer a valuable instrument to correct enforcement imperfections. Such imperfections include imperfect compensation and litigation costs.
Keywords: Executory Contracts, Remedies for Breach, Defense of Non-Performance, Preclusion Rule
JEL Classification: K12, K41
Date posted: September 28, 2010
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