Opportunistic Termination

Abstract

If a seller delivers a good non-conforming to contract, European and US warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer may use non-conformity as a pretext for getting rid of a contract he no longer wants. We show that this possibility of "opportunistic termination" might actually have positive effects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination might increase welfare by enabling a more efficient output level in a setting with multiple buyers. These potential benefits are absent if renegotiation is possible.

Installment Contracts and Material Breach

“…23 To my knowledge, this analysis is the first to consider breach of contract (and remedies) in a setting of sequential delivery with interim performance evaluation so that contracts are nondivisible. Recent studies by Brooks and Stremitzer (2011), Stremitzer (2012a, 2012b, or Ganglmair (2017) analyze the buyer's right to reject past deliveries. They do not consider multiperiod trade and nondivisibility of contract as it results from cancellation of future deliveries.…”

“…This is the first article that studies early contract termination in the form of cancellation of future deliveries. Recent studies by Brooks and Stremitzer (2011), Stremitzer (2012a, 2012b, and Ganglmair the buyer's valuation of the exchanged good whereas a seller's investment reduces the seller's costs of production) or Che and Chung (1999), Che and Hausch (1999), or Schweizer (2006) for analyses with cooperative investment that has a direct benefit to the investing firm's trading partner.…”