Legal Damages for Losses of Chances

This paper deals with legal damages if losses of chances are at stake. In response to disparate ad hoc rules that have emerged from legal practice in Europe, the present paper proposes a unifying principle to handle such cases. Quite generally, the purpose of a damages award is to compensate the claimant and should be based on the difference in value between due performance and actual performance. To cope with limited observability, it is suggested to still award the difference though on average over the observed event. The paper calculates damages in line with this general principle. The proposed damage scheme is shown to fully compensate the victim and to provide efficient incentives for precaution, be it that multiple injurers act non-cooperatively or in concert, even if losses of chances are at stake

Cooperative Investments Induced by Contract Law

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004This paper revisits the economic analysis of contract law for a setting of cooperative investments. While Che and Chung (1999) have shown that expectation damages perform rather poorly, the present paper argues that this negative result follows from their impicit assumption of unilateral expectation damages. Yet, the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages. It is shown that such a regime of bilateral expectation damages provides the incentives for the first best solution even in a framework of binary choice where, for selfish investments, the traditional overreliance result would hold

Reliance Investments, Expectation Damages and Hidden Information

A setting of reliance investments is explored where one of the parties to a contract obtains private information concerning his utility or cost function that remains hidden to the other party and to courts. As a consequence, it will be a difficult task to award expectation damages corrrectly to a party with private information who sufffers from breach of contract. While a revelation mechanism would exist that leads to the first best solution, assessing expectation damages correctly turns out to be at odds with ex post efficiency. I conclude that, under asymmetric information, the performance of expectation damages falls short of what more general mechanisms could achieve

Acquisition and Disclosure of Information as a Hold-up Problem

The acquisition of information prior to sale gives rise to a hold-up situation quite naturally. Yet, while the bulk of the literature on the hold-up problem considers negotiations under symmetric information where cooperative short-cuts such as split the difference capture the outcome of bargaining, in the present setting, parties negotiate under asymmetric information where the outcome must be derived from a non-cooperative bargaining procedure. To avoid the difficult task of specifying and solving complicated games combining elements of signalling and screening, but to still compare incentives for acquiring information under voluntary versus mandatory disclosure, use of conditions such as incentive, disclosure and participation constraints only is made that are common to all non-cooperative bargaining outcomes

Tortious Acts Affecting Markets

The present paper examines an injurer causing a temporary blackout to a firm as the primary victim but also affecting customers and competitors of the firm. Reflecting existing legal practice, the paper investigates efficiency properties of the negligence rule granting recovery of private losses but to the primary victim only. The regime is shown to provide efficient incentives for precaution provided that the primary loss exceeds the social loss from accidents. The main contribution of the paper consists of an explicit analysis of markets affected by a temporary blackout of one firm. The analysis reveals that the private loss exceeds the social loss indeed if the market is less than fully competitive. Moreover, the net social loss remains positive, no matter which market structure prevails

Breach Remedies, Performance Excuses, and Investment Incentives

Contract law is usually perceived as a strict liability system. When a promisor fails to perform he is held liable even if he is without fault. If, however, an unusual contingency has arisen he may be excused from performing provided that he has taken reasonable precautions. For a setting with uncertain costs of and benefits from performance, it is shown that a fixed price contract is sufficient to generate efficient reliance and precautions incentives under the following legal regime. If the promisor has met the appropriate precaution standard then he is excused if performance fails to be profitable. Alternative regimes, in contrast, where he is excused if performance is inefficient or even is extremely costly distort investment incentives quite generally