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Efficient Reliance and Damage Measures for Breach of Contract

Rogerson, William P. (1984) Efficient Reliance and Damage Measures for Breach of Contract. RAND Journal of Economics, 15 (1). pp. 39-53. ISSN 0741-6261.

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This article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it. It is assumed that postbreach bargaining is possible and carried out in a cooperative fashion, and that buyers and sellers form expectations about the outcome of such bargaining in a specific way. Without enforceable contracts, the potential appropriability of specific rents results in inefficiently low levels of investment. Three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be Pareto-ranked from best to worst as follows: specific performance, expectation damages, and reliance damages.

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Alternate Title:Efficient Reliance and Contract Remedies
Additional Information:© 1984 RAND Corporation. I would like to thank Robert Bates, Kathleen Hagerty, Roger Noll, Mitchell Polinsky, Alan Schwartz, Steven Shavell, Louis Wilde, and two anonymous referees for useful comments. This work was supported by National Science Foundation Grant SES 820323 at the Institute for Mathematical Studies in the Social Sciences, Stanford University. Formerly SSWP 340. Originally titled "Efficient Reliance and Contract Remedies".
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Subject Keywords:Contracts, Specific performance, Contract negotiations, Capital costs, Production efficiency, Sellers surplus, Efficiency metrics, Contract breaches, Expected returns, Scrap value
Issue or Number:1
Record Number:CaltechAUTHORS:20171117-155228827
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83318
Deposited By: Jacquelyn Bussone
Deposited On:18 Nov 2017 00:25
Last Modified:03 Oct 2019 19:05

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