Expectation Damages, Divisible Contracts, and Bilateral Investment

摘要

We have shown that, in the framework of expectation damages with bilateral investment in Edlin and Reichelstein (1996), the first best can be restored if both parties face the risk of breaching. With divisible contracts, this can always be achieved with a lottery between a high and a low per-unit price, or with a fixed price if the payoff functions are sufficiently concave. In both cases, each party's probability of breaching varies with price, such that price and quantity are sufficient to fine-tune both sides' incentives to invest. Consequently, also in this framework, the trading parties can write noncontingent contracts and obtain efficient outcomes, relying on renegotiation and the standard breach remedy of expectation damages.