Daniel Göller, ‘Expectation Damages and Bilateral Cooperative Investments’

We examine the efficiency of the standard breach remedy expectation damages in a setting where the buyer invests cooperatively and the seller invests both cooperatively and selfishly. Contracts may specify a required quality level and an upper bound to the seller’s coordination costs. We find that it is optimal to write an augmented Cadillac contract in which quality is stipulated such that it cannot be met with positive probability together with a very low price. Thus, the seller becomes a residual claimant and the coordination-cost threshold can be used to balance the incentives of the buyer.

Daniel Göller, Expectation Damages and Bilateral Cooperative Investments. American Law and Economics Review (Fall 2014) 16 (2): 473-498, doi: 10.1093/aler/ahu002.

First posted 2014-10-08 07:00:34

Leave a Reply