Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages / Aaron S. Edlin.

Format:

Book

Author/Creator:

Edlin, Aaron S.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4915.

NBER working paper series no. w4915

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Cadillac Contracts and Up-Front Payments

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

This paper shows that up-front payments can play a crucial role in providing efficient investment incentives when contracts are incomplete. They can eliminate the overinvestment effect identified by Rogerson [1984] and Shavell [1980] when courts use an expectation damage remedy. This method extends to complex contracting situations if parties combine up-front payments with what we call 'Cadillac' contracts (contracts for a very high quality or quantity). This combination provides efficient investment incentives in complex contracting problems when an expectation damage remedy is accompanied by a broad duty to mitigate damages. This indicates that an expectation remedy is well-suited to multidimensional, but one-sided, investment problems, in contrast to specific performance, which Edlin and Reichelstein [1993] showed is well-suited to two-sided, but unidimensional, investment problems.

Notes:

Print version record

November 1994.