Breach Remedies Inducing Hybrid Investments

28 Pages Posted: 20 Oct 2009 Last revised: 14 Oct 2011

Daniel Göller

University of Agder - Department of Economics and Finance, School of Business and Law

Alexander Stremitzer

UCLA School of Law

Date Written: October 13, 2011

Abstract

We show that parties in bilateral trade can rely on the default common law breach remedy of `expectation damages' to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a sufficiently high quality level. In contrast, the result by Che and Chung (1999) that `reliance damages' induce the first best in a setting of purely cooperative investments, does not generalize to the hybrid case. Different from Plambeck and Taylor (2007) we argue that properly specified expectation damages perform well in close to any situation given that sufficient information is available to assess them. The main role for alternative regimes such as specific performance or reliance damages would then be to offer alternative solutions for situations where accounting systems render them easier to assess than expectation damages.

Keywords: supply chain management, contract manufacturing, relationship specific investment, hybrid investment, breach remedies.

JEL Classification: M11, M40, K12, L22, J41, C70

Suggested Citation

Göller, Daniel and Stremitzer, Alexander, Breach Remedies Inducing Hybrid Investments (October 13, 2011). Yale Economics Department Working Paper No. 72; Yale Law & Economics Research Paper No. 395. Available at SSRN: https://ssrn.com/abstract=1491615

Daniel Göller (Contact Author)

University of Agder - Department of Economics and Finance, School of Business and Law ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Alexander Stremitzer

UCLA School of Law ( email )

405 Hilgard Avenue
Box 90095-1476
Los Angeles, CA 90095-1476
United States

HOME PAGE: http://www.law.ucla.edu/faculty/all-faculty-profiles/professors/Pages/Alexander-Stremitzer.aspx

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