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Cooperative Investments Induced by Contract Law

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  • Urs Schweizer

    (University of Bonn)

Abstract

I revisit the economic analysis of contract law for a setting of cooperative investments. While Che and Chung (1999) have shown that expectation damages perform rather poorly, I argue that this negative result follows from their implicit assumption of unilateral expectation damages. Yet the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages. I show that such a regime of bilateral expectation damages provides the incentives for the first-best solution even in a framework of binary choice where, for selfish investments, the traditional overreliance result would hold.

Suggested Citation

  • Urs Schweizer, 2006. "Cooperative Investments Induced by Contract Law," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 134-145, Spring.
    • Handle: RePEc:rje:randje:v:37:y:2006:1:p:134-145
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    Citations

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    Cited by:

    1. Daniel Göller, 2014. "Expectation Damages and Bilateral Cooperative Investments," American Law and Economics Review, American Law and Economics Association, vol. 16(2), pages 473-498.
    2. Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.
    3. Rebecca Stone & Alexander Stremitzer, 2020. "Promises, Reliance, and Psychological Lock-In," The Journal of Legal Studies, University of Chicago Press, vol. 49(1), pages 33-72.
    4. Göller, Daniel & Stremitzer, Alexander, 2009. "Breach Remedies Including Hybrid Investments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 282, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    5. Alexander Stremitzer, 2012. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(2), pages 337-359.
    6. Göller, Daniel & Stremitzer, Alexander, 2014. "Breach remedies inducing hybrid investments," International Review of Law and Economics, Elsevier, vol. 37(C), pages 26-38.
    7. Schweizer, Urs, 2007. "Tortious acts affecting markets," International Review of Law and Economics, Elsevier, vol. 27(1), pages 49-69, March.
    8. Steven Walt, 2011. "Penalty Clauses and Liquidated Damages," Chapters, in: Gerrit De Geest (ed.), Contract Law and Economics, chapter 10, Edward Elgar Publishing.
    9. Arya, Anil & Löffler, Clemens & Mittendorf, Brian & Pfeiffer, Thomas, 2015. "The middleman as a panacea for supply chain coordination problems," European Journal of Operational Research, Elsevier, vol. 240(2), pages 393-400.
    10. Brooks, Richard & Stremitzer, Alexander, 2009. "On and Off Contract Remedies," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 290, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    11. Calcott Paul & Petkov Vladimir P, 2010. "Contracting for Dynamic Efficiency," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-22, August.
    12. Albert H. Choi & George Triantis, 2021. "Contract Design When Relationship-Specific Investment Produces Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 50(2), pages 219-260.
    13. Alessandro De Chiara, 2018. "Courts' Decisions, Cooperative Investments, and Incomplete Contracts," CEU Working Papers 2018_5, Department of Economics, Central European University.
    14. Schweizer, Urs, 2016. "Efficient incentives from obligation law and the compensation principle," International Review of Law and Economics, Elsevier, vol. 45(C), pages 54-62.
    15. Richard R.W. Brooks & Alexander Stremitzer, 2012. "On and Off Contract Remedies Inducing Cooperative Investments," American Law and Economics Review, American Law and Economics Association, vol. 14(2), pages 488-516.
    16. Bernhard Ganglmair, 2008. "Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking," JEPS Working Papers 08-001, JEPS.
    17. Francesco Parisi & Barbara Luppi & Vincy Fon, 2011. "Optimal Remedies for Bilateral Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 40(1), pages 245-271.
    18. Zhiqi Chen & Xiaoqiao Wang, 2020. "Specific investment, supplier vulnerability and profit risks," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1215-1237, October.
    19. Christoph Engel & Lars Freund, 2017. "Behaviorally Efficient Remedies – An Experiment," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2017_17, Max Planck Institute for Research on Collective Goods.
    20. Oren Bar-Gill & Lucian A. Bebchuk, 2007. "Consent and Exchange," NBER Working Papers 13267, National Bureau of Economic Research, Inc.

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