Standard Breach Remedies, Quality Thresholds, and Cooperative Investments
Journal of Law, Economics, and Organization, 2012, 28(2): 337-359.
30 Pages Posted: 19 Jul 2008 Last revised: 13 Nov 2013
Date Written: April 4, 2010
When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, in order to lower informational requirements of courts, parties may opt for a "specific performance" regime which grants the breached- against buyer an option to choose "restitution" if the tender’s value falls below some (arbitrarily chosen) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999).
Keywords: breach remedies, incomplete contracts, cooperative investments
JEL Classification: K12, L22, J41, C70
Suggested Citation: Suggested Citation