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Early Contract Termination, Performance-Contingent Control Rights, and Specific Investment


Bernhard Ganglmair


University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

August 29, 2012


Abstract:     
Many early-termination provisions in multi-shipment contracts (in the form of explicit contract clauses or legal default rules) are performance-contingent and limit the right to termination (and cancellation of future deliveries) to cases of sufficiently poor performance at earlier stages of the contract. Analyzing an environment of court-enforced incomplete contracts with relationship-specific investment, I show that the right to early termination facilitates first-best implementation by solving a standard holdup problem. A necessary condition for this outcome is the performance-contingency of said termination provisions, rendering the contract nondivisible by introducing memory. I further illustrate when this right to early termination is optimally limited to cases of sufficiently poor performance.

Number of Pages in PDF File: 30

Keywords: contingent control rights; early termination; expectation damages; holdup; incomplete contracts; material breach of contract; nondivisible contracts.

JEL Classification: D23, D86, K12, L42

working papers series


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Date posted: October 2, 2009 ; Last revised: August 31, 2012

Suggested Citation

Ganglmair, Bernhard, Early Contract Termination, Performance-Contingent Control Rights, and Specific Investment (August 29, 2012). Available at SSRN: http://ssrn.com/abstract=983040 or http://dx.doi.org/10.2139/ssrn.983040

Contact Information

Bernhard Ganglmair (Contact Author)
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )
800 W Campbell Rd (SM31)
Richardson, TX 75080
United States
HOME PAGE: http://www.utdallas.edu/~ganglmair
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