Download this Paper Open PDF in Browser

Courts' Decisions, Cooperative Investments, and Incomplete Contracts

49 Pages Posted: 14 Jun 2017  

Alessandro De Chiara

Central European University (CEU) - Department of Economics

Date Written: June 13, 2017

Abstract

Buyers are often concerned about the adequateness of the design of the goods they procure. To reduce the probability of a design failure, buyers may try to motivate the sellers to make relationship-specific investments. In this paper I study how courts’ decisions affect sellers’ cooperative investment and buyers’ specification of the good. In assigning liability for a defective design, in some countries courts examine how much real authority the seller had in performing the work, instead of considering how formal authority was contractually allocated between the parties. I show that this approach induces the sellers to invest, albeit suboptimally, but leads the buyers to inefficiently under-specify the design of the good. 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 (June 13, 2017). Available at SSRN: https://ssrn.com/abstract=2985620

Alessandro De Chiara (Contact Author)

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

Nador u. 9.
Budapest H-1051
Hungary

Paper statistics

Downloads
8
Abstract Views
103