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Pre-Contractual Reliance

Author

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  • Lucian Arye Bebchuk
  • Omri Ben-Shahar

Abstract

During contractual negotiations, parties often make (reliance) expenditures that would increase the surplus should a contract be made. This paper analyzes decisions to invest in pre-contractual reliance under alternative legal regimes. Investments in reliance will be socially suboptimal in the absence of any pre-contractual liability -- and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how 'intermediate' liability rules could be best designed to induce efficient reliance decisions. One of our results indicates that the case for liability is shown to be stronger when a party retracts from terms that it has proposed or from preliminary understandings reached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that pre-contractual liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations.

Suggested Citation

  • Lucian Arye Bebchuk & Omri Ben-Shahar, 2001. "Pre-Contractual Reliance," NBER Working Papers 8235, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8235
    Note: LE
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    Cited by:

    1. Jacobi, Osnat & Weiss, Avi, 2013. "Allocation of fault in contract law," International Review of Law and Economics, Elsevier, vol. 36(C), pages 1-11.
    2. Robert C. Bird & Vivek Soundararajan, 2020. "The Role of Precontractual Signals in Creating Sustainable Global Supply Chains," Journal of Business Ethics, Springer, vol. 164(1), pages 81-94, June.
    3. Steven Shavell, 2003. "Economic Analysis of Contract Law," NBER Working Papers 9696, National Bureau of Economic Research, Inc.
    4. A. Mitchell Polinsky & Steven Shavell, 2005. "Economic Analysis of Law," Discussion Papers 05-005, Stanford Institute for Economic Policy Research.
    5. 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.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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