Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

Abstract

When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages” close to legal practice, we show that the commonly applied remedy of US contract law induces the first best. Yet, in order to lower informational requirements of courts, parties may opt for a specific performance regime which grants the breached- against buyer an option to choose restitution if the tender’s value falls below some (arbitrarily chosen) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Che and Hausch (1999).