Question
Suppose is selling a good to , but the contract has bilateral reliance investments, meaning both and make investments {!, }. The contract specifies, then,
Suppose is selling a good to , but the contract has bilateral reliance investments, meaning both and make investments {!, "}. The contract specifies, then, that if a party breaches, they must pay damages {!,"} to the harmed party, where ! go to and " go to , which are zero otherwise. Suppose is the value of the contract to , is the cost of production to , and is the negotiated price. (a) Set up the table of payoffs for both parties in the case of performance and breach. (b) What is the condition for breach from a socially efficient perspective? (c) When will breach? What should the court set ! equal to in order to achieve efficient breach? (d) When will breach? What should the court set " equal to in order to achieve efficient breach?
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