Courts' Decisions, Cooperative Investments, and Incomplete Contracts

60 Pages Posted: 14 Jun 2017 Last revised: 21 Jul 2018

Alessandro De Chiara

Central European University (CEU) - Department of Economics

Date Written: July 10, 2018

Abstract

Buyers may try to motivate their sellers to make relationship-specific investments to reduce the probability that the design of the goods they procure is defective. In some countries, courts examine how much real authority the seller had in performing the work to assign liability for a design failure. I show that this courts' approach induces the sellers to under-invest and the buyers to under-specify the design of the goods. I find that this approach can also make it harder to sustain optimal relational contracting, leading to the conclusion that it cannot be justified on efficiency grounds.

Keywords: Cooperative Investments, Courts, Defective Specifications, Design Failure, Expectation Damages, Formal and Real Authority, Incomplete Contracts, Relational Contracts

JEL Classification: D23, D86, K12, L23, L24

Suggested Citation

De Chiara, Alessandro, Courts' Decisions, Cooperative Investments, and Incomplete Contracts (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=2985620 or http://dx.doi.org/10.2139/ssrn.2985620

Alessandro De Chiara (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

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