Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages
Journal of Law, Economics, and Organization, Vol. 12, No. 1, 1996.
Posted: 19 Jun 1998
This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980), by controlling which party breaches a contract. At the same time, "Cadillac" contracts (contracts for a very high quality or quantity) can protect against under-investment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well-suited to multidimensional but one-sided investment problems, in contrast to specific performance, which is well-suited to two-sided but unidimensional investment problems.
JEL Classification: G31, K12, K22
Suggested Citation: Suggested Citation