Ex Ante versus Ex Post Expectation Damages

17 Pages Posted: 5 Mar 2010 Last revised: 7 Oct 2015

See all articles by Zhiyong (John) Liu

Zhiyong (John) Liu

Indiana State University - Scott College of Business

Ronen Avraham

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law; University of Texas at Austin - School of Law

Date Written: November 9, 2012

Abstract

What information should courts utilize when assessing contract damages? Should they award damages that were rationally foreseeable at the ex ante stage (ex ante expected damages)? Or should they award damages at the ex post level, incorporating new information revealed after contracting (ex post actual damages)? In practice courts have varied between the two approaches, awarding damages equal to the lower, or the higher, of the two measures of damages. This article shows that ex ante expectation damages are more efficient than ex post actual damages through a simple model of costly litigation for contract breach, where there are either costs of verifying the breach victim’s ex post damages, or general litigation costs such as attorneys’ fees. Courts should award foreseeable flat damages, rather than seeking ex post accuracy and awarding actual damages, because actual damages lead to distortions in breach incentives once we take parties’ litigation decisions as endogenous. With costly litigation, ex post expectation damages may cause over-performance or under-performance depending on whether the American or the English rule applies and on the size of the litigation cost. We find that regardless of the direction of the distortion, actual damages induce inefficiency. Ex ante damages are more efficient because of the insensitivity of parties’ litigation decisions to their ex post private information under fixed damages. Our results are robust when accounting for renegotiation.

Keywords: of Contract, Asymmetric Information, Expectation Interest, Renegotiation

JEL Classification: K0, K12, D82, D86

Suggested Citation

Liu, Zhiyong (John) and Avraham, Ronen, Ex Ante versus Ex Post Expectation Damages (November 9, 2012). International Review of Law and Economics, Vol. 32, pp. 339-355, 2012; University of Texas Law, Law and Economics Research Paper No. 138. Available at SSRN: https://ssrn.com/abstract=1520288 or http://dx.doi.org/10.2139/ssrn.1520288

Zhiyong (John) Liu

Indiana State University - Scott College of Business ( email )

Scott College of Business
Indiana State University
Terre Haute, IN 47809
United States

Ronen Avraham (Contact Author)

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law ( email )

Tel Aviv
Israel

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)

HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

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