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  3. American Economic Review
  4. September 2009
  5. Expectation Damages, Divisible Contracts, and Bilateral Investment

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Expectation Damages, Divisible Contracts, and Bilateral Investment

  • Susanne Ohlendorf
American Economic Review
vol. 99, no. 4, September 2009
(pp. 1608–18)
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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)

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

Additional Materials

JEL Classification

  • D86 Economics of Contract: Theory
  • K12 Contract Law