Breach of Contract: An Economic Analysis of the Efficient Breach Scenario (International Law and Economics)

Contents
Chapter 1: Introduction
	1.1 Content of the Analysis
		1.1.1 Scenario
		1.1.2 Method: Law and Economics
			1.1.2.1 Welfare Economics
			1.1.2.2 Homo Economicus
			1.1.2.3 Behavioral Law and Economics
		1.1.3 Remedies
			1.1.3.1 Specific Performance
			1.1.3.2 Expectation Damages
			1.1.3.3 Penalty Clauses
			1.1.3.4 Liquidated Damages
			1.1.3.5 Property and Liability Rules
	1.2 Limits of the Analysis
		1.2.1 Method
		1.2.2 Enforcement of Contracts
		1.2.3 Optimal Investment
		1.2.4 Type of Rules
	References
Chapter 2: Breach or Perform Decision: The Traditional Model of the Efficient Breach
	2.1 Expectation Damages
	2.2 Specific Performance and Renegotiating the Contract
	References
Chapter 3: Distributional Effects and the Original Contract
	3.1 Price Mechanism
	3.2 Interaction Between Remedies and Bargaining Power
		3.2.1 Determinants of Bargaining Power
		3.2.2 Discount Factors
		3.2.3 Disagreement Points
			3.2.3.1 Third Parties, Disagreement Points, and Prices
			3.2.3.2 Two Buyers Scenario Under Different Remedies
			3.2.3.3 Two Sellers Scenario Under Different Remedies
	3.3 Uncertainty
		3.3.1 Probability of an Increase in Costs
		3.3.2 Magnitude of Increase
		3.3.3 Bargaining Power
	3.4 Unsuccessful Renegotiation
		3.4.1 Expected Unsuccessful Renegotiation
		3.4.2 Unexpected Unsuccessful Renegotiation
	3.5 Result
	References
Chapter 4: The Option to Cover
	4.1 When Does the Option to Cover Exist?
		4.1.1 Market Structure
		4.1.2 Subjective Perspective
	4.2 Consequences for Efficiency
		4.2.1 Homogenous, Fungible, and Other Goods of Equal Kind and Value
			4.2.1.1 Expectation Damages
			4.2.1.2 Specific Performance
			4.2.1.3 Result
		4.2.2 Differentiated Goods
			4.2.2.1 Expectation Damages
			4.2.2.2 Specific Performance
			4.2.2.3 Result
	4.3 Result
	References
Chapter 5: Over- and Undercompensation
	5.1 The Shortfall of Damages
		5.1.1 General Reasons for Shortfall
		5.1.2 Shortfall of Damages Beyond the Money
		5.1.3 Modeling the Shortfall
			5.1.3.1 Deciding About Performance or Breach
			5.1.3.2 Contracting Stage
		5.1.4 Shortfall of Damages and Bargaining Power
			5.1.4.1 Seller Has All the Bargaining Power
			5.1.4.2 General Relationship Between Bargaining Power, Price, and Shortfall
		5.1.5 Shortfall Due to Litigation Costs
		5.1.6 Keeping Contracts
			5.1.6.1 Seller Performs Based on Moral Duty
			5.1.6.2 Reciprocity
		5.1.7 Shortfall and Renegotiation
	5.2 Overcompensatory Damages
	5.3 Result
	References
Chapter 6: Incomplete Information
	6.1 Buyer Having Private Information About His Valuation
		6.1.1 Effect of Seller´s Incomplete Information on Standard Model (Ex Post)
			6.1.1.1 Analysis
			6.1.1.2 Result and Further Questions
		6.1.2 Ex Post Stage: Renegotiation
			6.1.2.1 Bargaining Under Incomplete Information
			6.1.2.2 Fully Compensatory Damages: Verifiable to Court
				Two Buyer Types Setting
					Specific Performance
					Expectation Damages
					Efficiency
					Result
				Two Buyer Types Setting and Costs for Offers
					Specific Performance
					Expectation Damages
					Efficiency
					Result
				Three Buyer Types Setting
					Specific Performance
					Expectation Damages
					Efficiency
					Result
			6.1.2.3 Shortfall of Damages: Constraints of Verifiability to Court
				Low Type´s Valuation Below Increased Costs and High Type´s Damages Below Costs
					Signaling
					Screening
					Result
				Low Type´s Valuation Below Increased Costs and High Type´s Damages Above Increased Costs
					Signaling
					Screening
					Result
				Low Type´s and High Type´s Valuation Above Seller´s Increased Costs But Low Type´s Damages Below Seller´s Increased Costs
					Signaling
					Screening
					Result
				Average Damages
				Result
			6.1.2.4 Result
		6.1.3 Taking the Ex Ante View: Negotiation at the Contracting Stage
			6.1.3.1 The Problem of Cross-Subsidization
				Buyer Makes a Take-It-or-Leave-It Offer
					First-Best Scenario
					Expectation Damages
					Specific Performance
						Side Payment in the Amount of the Seller´s Increased Costs
						Side Payment in the Amount of the High Type´s Valuation
						Side Payment Between the Type´s Valuation and the Seller´s Increased Costs
				Seller Makes a Take-It-or-Leave-It Offer
					First-Best Scenario
					Expectation Damages
					Specific Performance
						Side Payment in the Amount of the Seller´s Increased Costs
						Side Payment in the Amount of the High Type´s Valuation
						Different Side Payments for Different Buyers
				Result
			6.1.3.2 Information Unraveling and Price Discrimination
				Unraveling and Full Disclosure
				Impediments to Disclosure
				Efficiency
			6.1.3.3 The Specific Case of the Efficient Breach Scenario
				First-Best Scenario
				The Seller´s Costs as a Ceiling to Cross-Subsidization
					Buyer Makes a Take-It-or-Leave-It Offer
					Seller Makes a Take-It-or-Leave-It Offer
				Expected Ex Post Inefficiency
					Seller Would Always Breach Under Expectation Damages
						Buyer Makes a Take-It-or-Leave-It Offer
						Seller Makes a Take-It-or-Leave-It Offer
					Seller Always Performs
						Buyer Makes a Take-It-or-Leave-It Offer
						Seller Makes a Take-It-or-Leave-It Offer
				Result
			6.1.3.4 Limited Compensation
				Effect of Foreseeability Doctrine on Contracting
					Breach Efficient Ex Post
					Ex Post Inefficiency
						Buyer Makes a Take-It-or-Leave-It Offer
						Seller Makes a Take-It-or-Leave-It Offer
				Conclusion of Contract as the Reference Point in Time
					Why Conclusion of the Contract
					Negative Side Effect
				Contractually Limiting Liability
					Default Rule: Unlimited Liability
						Buyer Makes Take-It-or-Leave-It Offer
						Seller Makes Take-It-or-Leave-It Offer
					Default Rule: Limited Liability
					Result
			6.1.3.5 Result
	6.2 Seller Having Private Information About Her Costs
		6.2.1 Ex Post Effects of Seller´s Private Information
			6.2.1.1 Specific Performance
				Signaling
				Screening
				Result
			6.2.1.2 Seller´s Private Information and the Shortfall of Damages
		6.2.2 Ex Ante Effects of Seller´s Private Information
			6.2.2.1 Seller Making a Take-It-or-Leave-It Offer
				First-Best Scenario
				Expectation Damages
				Specific Performance
			6.2.2.2 Buyer Making a Take-It-or-Leave-It Offer
				First-Best Scenario
				Expectation Damages
				Specific Performance
			6.2.2.3 Result
	References
Chapter 7: Transaction Costs
	7.1 Renegotiation Costs
		7.1.1 Scale of Renegotiation Costs
			7.1.1.1 Bilateral Monopoly
				Bargaining and Bilateral Monopoly
				Renegotiating the Contract Under Specific Performance and Outside Options
					Contract Allows Seller to Cover
					Contract Excludes Possibility to Cover
			7.1.1.2 Zero-Sum Game
			7.1.1.3 Urgency
		7.1.2 Renegotiation and Incomplete Information
		7.1.3 Renegotiation and Preferences for Fairness
		7.1.4 Prospect Theory and the Endowment Effect
			7.1.4.1 Loss Aversion and the Endowment Effect in the Efficient Breach Scenario
			7.1.4.2 Conclusion
	7.2 Contracting
		7.2.1 Difference in Contracting Costs
		7.2.2 Inefficient Contracting Due to Flawed Estimation of Risk
			7.2.2.1 Behavioral Insights on People Failing to Predict Probabilities
			7.2.2.2 Seller Underestimates Risk
			7.2.2.3 Buyer Underestimates Risk
			7.2.2.4 Seller and Buyer, Underestimate Risk
			7.2.2.5 Result
	7.3 Litigation Costs
		7.3.1 Relationship of Assessment and Bargaining Costs
		7.3.2 Constrains for Assessing Damages
	7.4 Enforcement Costs
	7.5 Result
	References
Chapter 8: Conclusion
	References