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Göller, Daniel
Stremitzer, Alexander
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SFB/TR 15 Discussion Paper 282
We show that parties in bilateral trade can rely on the default common law breach remedy of '€˜expectation damages' to induce simultaneously ?rst-best relationship-speci?c investments of both the sel?sh and the cooperative kind. This can be achieved by writing a contract that speci?es a suffciently high quality level. In contrast, the result by Che and Chung (1999) that '€˜reliance damages' induce the ?rstbest in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality speci?ed in the contract is too low, '€˜expectation damages' do not necessarily induce the ex-post effcient trade decision in the presence of cooperative investments.
breach remedies
incomplete contracts
hybrid investments
cooperative investments
sel?sh investments
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Working Paper

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