Breach Remedies Inducing Hybrid Investments
University of Agder - Department of Economics and Finance, School of Business and Law
UCLA School of Law
October 13, 2011
Yale Economics Department Working Paper No. 72
Yale Law & Economics Research Paper No. 395
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.
Number of Pages in PDF File: 28
Keywords: supply chain management, contract manufacturing, relationship specific investment, hybrid investment, breach remedies.
JEL Classification: M11, M40, K12, L22, J41, C70
Date posted: October 20, 2009 ; Last revised: October 14, 2011