Cadillac Contracts and Up-front Payments: Efficient Investment under Expectation Damages

Citation data:

Journal of Law, Economics, and Organization, Vol: 12, Page: 98

Publication Year:
1996
Usage 554
Downloads 548
Abstract Views 6
Repository URL:
http://scholarship.law.berkeley.edu/facpubs/112
Author(s):
Edlin, Aaron S.
Tags:
Contracts; Economic Law; Investment; Breach of Contract; Law
article description
This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980), by controlling which party breaches a contract. At the same time, "Cadillac" contracts (contracts for a very high quality or quantity) can protect against underinvestment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well-suited to multidimensional but one-sided investment problems, in contrast to specific performance, which is well-suited to two-sided but unidimensional investment problems.