Holdups, Standard Breach Remedies, and Optimal Investment

Posted: 25 Jun 1998

See all articles by Aaron S. Edlin

Aaron S. Edlin

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

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1995

Abstract

In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after information about the desirability of trade is revealed. We find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems.

JEL Classification: K12, C7, D8

Suggested Citation

Edlin, Aaron S. and Reichelstein, Stefan J., Holdups, Standard Breach Remedies, and Optimal Investment (August 1995 ). Available at SSRN: https://ssrn.com/abstract=10009

Aaron S. Edlin (Contact Author)

University of California at Berkeley ( email )

Dept of Economics 549 Evans Hall #3880
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National Bureau of Economic Research (NBER)

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Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business ( email )

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650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

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