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Holdups, Standard Breach Remedies, and Optimal Investment
American Economic Review (1996)
  • Aaron S. Edlin
  • Stefan J. Reichelstein, University of California, Berkeley
Abstract

In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after information about the desirability of trade is revealed. We find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems.

Publication Date
June, 1996
Citation Information
Aaron S. Edlin and Stefan J. Reichelstein. "Holdups, Standard Breach Remedies, and Optimal Investment" American Economic Review (1996)
Available at: http://works.bepress.com/aaron_edlin/8/