Contract Damages and Cooperative Investments
Posted: 16 Dec 1996
There are 2 versions of this paper
Contract Damages and Cooperative Investments
Date Written: August 1996
Abstract
This paper studies alternative contract damage measures in the presence of specific investments that generate a direct benefit to the investor's trading partner (referred to as "cooperative investments"). We find that, both with and without the possibility of ex post renegotiation, (i) the standard rules of remedy for breach of contracts such as expectation damages perform poorly in the presence of cooperative investments, (ii) the privately stipulated damages can achieve a better, albeit inefficient, outcome, and (iii) the reliance damages rule performs the best, achieving the fully efficient outcome in the presence of ex post renegotiation. These rankings stand in stark contrast to those found in the existing literature but explain such practices as termination for convenience, investment subsidies, and cost-based reimbursement, often employed in government contracts.
JEL Classification: D23, K12, L14
Suggested Citation: Suggested Citation