TY  - JOUR
AU  - Edlin,Aaron S.
TI  - Cadillac Contracts and Up-Front Payments: Efficient Investment Under    Expectation Damages
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4915
PY  - 1994
Y2  - November 1994
UR  - http://www.nber.org/papers/w4915
L1  - http://www.nber.org/papers/w4915.pdf
N1  - Author contact info:
Aaron Edlin
The Richard W. Jennings '39 Endowed Chair
University of California, Berkeley
Department of Economics and School of Law
Berkeley, CA   94720-7200
Tel: 510/642-4719
Fax: 510/642-3767
E-Mail: edlin@econ.berkeley.edu
AB  - This paper shows that up-front payments can play a crucial role in providing efficient investment incentives when contracts are incomplete.  They can eliminate the overinvestment effect identified by Rogerson [1984] and Shavell [1980] when courts use an expectation damage remedy.  This method extends to complex contracting situations if parties combine up-front payments with what we call 'Cadillac' contracts (contracts for a very high quality or quantity).  This combination provides efficient investment incentives in complex contracting problems when an expectation damage remedy is accompanied by a broad duty to mitigate damages.  This indicates that an expectation remedy is well-suited to multidimensional, but one-sided, investment problems, in contrast to specific performance, which Edlin and Reichelstein [1993] showed is well-suited to two-sided, but unidimensional, investment problems.
ER  -