Risk Sharing through Breach of Contract Remedies / A. Mitchell Polinsky.

Format:

Book

Author/Creator:

Polinsky, A. Mitchell.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0714.

NBER working paper series no. w0714

Language:

English

Subjects (All):

Breach of contract.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1981.

Cambridge, Massachussetts : National Bureau of Economic Research, [1981]

Summary:

This paper examines the sharing of risk under three different remedies for breach of contract. The risk considered arises from the possibility that, after a seller and buyer have entered into an agreement for the exchange of some (not generally available) good, a third party who values the good more than the original buyer may come along before delivery has occurred; the seller will want to breach. It is shown that this risk is optimally allocated by the expectation damage remedy if the seller is risk neutral and the buyer is risk averse, by the specific performance remedy if the opposite is true, and by a liquidated damage remedy if both parties are risk averse. The level of damages under the liquidated damage remedy is also shown to be bounded by the expectation measure of damages and a "damage equivalent" to the specific performance remedy. By means of a numerical example, it is shown that use of the prevailing remedy for breach of contract -- the expectation damage remedy -- may plausibly cause a welfare loss of as much as 20% due to inappropriate risk sharing.

Notes:

Print version record

July 1981.