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Optimal Remedies for Bilateral Contracts

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  • Francesco Parisi
  • Barbara Luppi
  • Vincy Fon

Abstract

In several contract situations, parties exchange promises of future performance, creating reciprocal obligations. In this paper, we extend the standard models of contract remedies to consider the incentives created by contracts where both parties provide only executory consideration and where the parties' obligations are yet to be performed. We show that the legal remedies that govern these contracts provide valuable enforcement mechanisms that are not available when parties enter into a contract in which they exchange a promise for an actual performance. We show that when the values of the parties' performances are interdependent, contracts with executory consideration create effort incentives that are superior to the incentives of contracts with executed consideration. In contracts with independent values, contracts with executory consideration also offer a valuable instrument to correct enforcement imperfections. Such imperfections include imperfect compensation and litigation costs.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jlstud:doi:10.1086/658406
    DOI: 10.1086/658406
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    References listed on IDEAS

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    1. Triantis, Alexander J & Triantis, George G, 1998. "Timing Problems in Contract Breach Decisions," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 163-207, April.
    2. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    3. Urs Schweizer, 2006. "Cooperative Investments Induced by Contract Law," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 134-145, Spring.
    4. Urs Schweizer, 2006. "Cooperative investments induced by contract law," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 134-145, March.
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    Cited by:

    1. Eric Lavallee, 2016. "Mediation with near insolvent defaulting suppliers: a linear optimisation model to find an optimal outcome," Papers 1602.04466, arXiv.org.

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