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Information Acquisition Activity and Damage Measures

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  • Jeong-Yoo Kim
  • Kyoungwon Rhee

Abstract

We examine the effect of various damage measures on the buyer's information acquisition efforts when the buyer can learn a signal about the production cost after a contract. We find that contrary to standard results, liquidated damages induce neither efficient performance nor efficient reliance, if a buyer decides to learn the signal, and that they do not provide a buyer with the incentive to acquire information. Thus, if acquiring information is costly enough, liquidated damages yield the highest social welfare among various damage measures, but otherwise, no damages, providing the incentive to acquire information, may perform better.

Suggested Citation

  • Jeong-Yoo Kim & Kyoungwon Rhee, 2006. "Information Acquisition Activity and Damage Measures," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(4), pages 543-556, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200612)162:4_543:iaaadm_2.0.tx_2-3
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    References listed on IDEAS

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    1. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-578, June.
    2. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    3. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(5), pages 1031-1042.
    4. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
    5. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    6. Bebchuk, Lucian Arye & Png, I. P. L., 1999. "Damage measures for inadvertant breach of contract," International Review of Law and Economics, Elsevier, vol. 19(3), pages 319-331, September.
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    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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