Cadillac Contracts and Up-front Payments: Efficient Investment Under Expectation Damages

A. S. Edlin
1996 Journal of Law, Economics & Organization  
This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980) , by controlling which party breaches a contract. At the same time, "Cadillac" contracts (contracts for a very high quality or quantity) can protect against underinvestment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well-suited to
more » ... nsional but one-sided investment problems, in contrast to specific performance, which is well-suited to two-sided but umdimensional investment problems. This essay expands upon earlier research (Edlin, 1993: Section 3.3). I thank Tai-Yeong Chung for his extensive comments and also thank two referees,
doi:10.1093/oxfordjournals.jleo.a023363 fatcat:fi7ucl3gdrdvtli3pbhwynxsjq