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American Economic Review: Vol. 99 No. 4 (September 2009)
AER Volume. 99, Issue 4 | 
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Expectation Damages, Divisible Contracts, and Bilateral Investment
Article Citation
Ohlendorf, Susanne. 2009. "Expectation Damages, Divisible Contracts, and Bilateral Investment."
American Economic Review,
99(4): 1608-18.
DOI: 10.1257/aer.99.4.1608
DOI: 10.1257/aer.99.4.1608
Abstract
This paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship-specific investment by the buyer and the seller. As demonstrated by Edlin and Reichelstein (1996), no contract that specifies only a fixed quantity and a fixed per-unit price can induce efficient investment if marginal cost is constant and deterministic. We show that this result does not extend to more general payoff functions. If both parties face the risk of breaching, the first best becomes attainable with a simple price-quantity contract. (JEL D86, K12)
Article Full-Text Access
Full-text Article
Additional Materials
Online Appendix (79.35 KB)
Authors
Ohlendorf, Susanne (U Bonn)
JEL Classifications
D86: Economics of Contract: Theory
K12: Contract Law
K12: Contract Law
