Efficient Reliance and Damage Measures for Breach of Contract

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.