Incomplete Contracts with Asymmetric Information: Exclusive Versus Optional Remedies

Avraham, Ronen; Liu, Zhiyong

doi:10.1093/aler/ahl011

Cited by 20 publications

(3 citation statements)

References 55 publications

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“…Thus, we account for a common source of incentives to terminate the contract opportunistically. Finally, our analysis is distinct from the one conducted by Avraham and Liu (2006) who also embrace the general importance of accounting for several optional remedies. Yet their model only compares a regime of exclusive liquidated damages with an alternative that combines pari passu liquidated damages with specific performance.…”

Section: Motivation and Main Resultsmentioning

confidence: 89%

Sequencing of remedies in sales law

Friehe

Tröger

2010

Eur J Law Econ

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This paper analyzes the effects of different sequences of remedies on the incentives of sellers to invest in product quality and on the probability of contract termination. For most European jurisdictions, Directive 1999/44/EC on the sale of consumer goods and its subsequent implementation into national law resulted in a substantial change in the remedies available to the consumer if a product proves deficient. Despite the purpose of the directive to harmonize national legislation, sales laws still differ significantly among member states. The analysis uses a stylized model to compare the pertinent features of two prototypical legal regimes that can be found after the directive's implementation. The pivotal difference between the respective regimes lies in the sequence of remedies. We show that it is possible that investment incentives and the probability that contractual relationships initiated will be completed may be larger under either legal regime. Despite the general case's ambiguity, we establish that the cancelation probability is typically lower if sales law limits buyers initial choice of remedies to subsequent performance. Our analysis indicates that the EC's harmonization target has been missed. With regard to social optimality, we detail under which conditions it is desirable to provide an institutional framework that allows total seller investment to be split between an initial and an incremental input.

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Section: Motivation and Main Resultsmentioning

confidence: 89%

Sequencing of remedies in sales law

Friehe

Tröger

2010

Eur J Law Econ

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“…In the future we plan to further explore this line of research by accounting for investment incentives and considering the problem of "hold up." Also we focused on exclusiveremedy contracts instead of optional-remedy contracts (in the sense that the non-breaching party can choose upon breach from a menu of different remedies, see Brooks (2006), Avraham and Liu (2006), Ayres and Goldbart (2001), and Ayres and Balkin (1997)). We would like to see how the option of acquiescing to breach affects those optional-remedy contracts in future research.…”

Section: Resultsmentioning

confidence: 99%

Private Information and the Option to Not Sue: A Reevaluation of Contract Remedies

Avraham¹,

Liu

2009

Journal of Law, Economics, and Organization

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In this paper we study contracts with two-sided incomplete information. Prior literature on contract remedies does not formally account for the non-breaching party's option to not sue for damages upon breach, when her expected payoff from suing is negative, given the contractual terms and her private information about her post breach loss. With this option incorporated into the analysis, we show that: First, courts should commit to awarding fixed damages, because awarding flexible damages based on ex post information will distort the incentives to breach. This result is not driven by the information forcing effect of basing damages on ex ante expectations, ̀ la Hadley vs. Baxendale. Second, the option of acquiescing to the breach expands the breach set under specific performance, which can be more efficient than other remedies. Third, the efficiency advantage of ex ante expectation damages over ex post actual damages is further enhanced when we account for the possibility of renegotiation. The main results are robust when we account for verification cost of plaintiff's damages and for parties' litigation cost.

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“…Avraham & Liu, 2006). Therefore, with symmetric incomplete information at contracting stage and no renegotiation, LD would be equivalent to ED.…”

Section: Ex Ante Expectation Damagesmentioning

confidence: 99%