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

See all articles by Aaron S. Edlin

Aaron S. Edlin

University of California at Berkeley; National Bureau of Economic Research (NBER)

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Abstract

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

Edlin, Aaron S., Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages. Journal of Law, Economics, and Organization, Vol. 12, No. 1, 1996.. Available at SSRN: https://ssrn.com/abstract=10004

Aaron S. Edlin (Contact Author)

University of California at Berkeley ( email )

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National Bureau of Economic Research (NBER)

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