Consider the game depicted in the following figure. Two companies

(Firm 1 and Firm 2) form a joint venture to develop a new product.

The players write a contract that obligates both parties to fully invest in the project, which relies on the courts to impose a remedy in the event of a breach. At the outset of the game, each company simultaneously, and independently, decides to fully invest (FI) or underinvest

(UI).

a. What is the normal form of this game with court-imposed expectation damages that encourages the strategy profile {FI, FI}?

Explain.

b. What is the normal form of this game with court-imposed reliance damages that encourages the strategy profile {FI, FI}? Explain.

c. What is the normal form of this game with court-imposed restitution damages that encourages the strategy profile {FI, FI}?

Explain.

d. Suppose that each player incurs court costs

(c) in the event of litigation following a breach of contract. What is the normal form of this game if the court imposes expectation damages?

e. What values for c will the plaintiff have an incentive to sue?

Transcribed Image Text:

Firm 2 FI UI FI (10,10) (2,19) Firm 1 UI (8,2) (6,6) Payoffs: (Firm 1, Firm 2)