Contract Damages and Cooperative Investments

Posted: 16 Dec 1996

See all articles by Yeon-Koo Che

Yeon-Koo Che

Columbia University

Tai-Yeong Chung

University of Western Ontario - Department of Economics

Multiple version iconThere are 2 versions of this paper

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

Che, Yeon-Koo and Chung, Tai-Yeong, Contract Damages and Cooperative Investments (August 1996). Available at SSRN: https://ssrn.com/abstract=10249

Yeon-Koo Che (Contact Author)

Columbia University ( email )

420 W. 118th Street, 1016IAB
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HOME PAGE: http://www.columbia.edu/~yc2271

Tai-Yeong Chung

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5C2
Canada
519-661-2111, ext. 85512 (Phone)
519-661-3666 (Fax)

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