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Cooperative investments induced by contract law

Cooperative investments induced by contract law 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Rand Journal of Economics Wiley

Cooperative investments induced by contract law

Schweizer, Urs
The Rand Journal of Economics , Volume 37 (1) – Mar 1, 2006
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References (6)

Publisher
Wiley
Copyright
Copyright © 2006 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0741-6261
eISSN
1756-2171
DOI
10.1111/j.1756-2171.2006.tb00008.x
Publisher site
See Article on Publisher Site

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.

Journal

The Rand Journal of Economics – Wiley

Published: Mar 1, 2006

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