6 - If we do want to enforce the contract, how do you fill...

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If we do want to enforce the contract, how do you fill in the details? o A. By what would be efficient, either 1. Because we want efficient law, or 2. Because that predicts what they would have agreed to, or 3. Because if you don't they have to waste resources specifying their contract in more detail so as to avoid your imposition of the terms you want and they don't. o B. Who should bear risks? We've been here before 1. The party who can best risk spread. 2. The party who can best control the risk: moral hazard. a. Himalayan photographer. If he doesn't tell the photo labs that his six rolls of film cost thirty thousand dollars to get, they don't owe him thirty thousand when they lose the film. b. Risk of strike, factory burning down, is best controlled by the producer--who owns the factory and negotiates with the workers, but . .. c. Risk of buyer deciding he doesn't need the product is best controlled by the buyer. 3. The party who best knows the risk--adverse selection. 4. Note that this is relevant both to negotiating the contract and to filling in the details. o C. What happens if someone breaches the contract? 1. Objective. Efficient breach--breach if and only if it makes the parties on net better off. + efficiency on other margins which will show up shortly. 2. Nothing: no enforceable contract. Inefficient breach? Not if Coase Theorem applies. 3. Breach forbidden--specific performance. Inefficient performance. Not if ... . 4. Expectation damages: a. Give the right incentive to breach. b. The wrong incentive to rely. c. the wrong incentive to sign if there is asymmetric information 5. Reliance damages: a. Wrong incentive to breach. b. Wrong incentive to rely. c. Right incentive to sign if breaching party has the asymmetric information. 6. Liquidated damages--agree in advance on what the damages will be if a breach occurs. a. Right incentive to rely--because damages don't depend on reliance expenditures. b. Right incentive to breach if and only if the amount agreed on is what expectation damages would be.
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c. Right incentive to sign if and only if the amount agreed on is what reliance damages would be. d. Penalty clause--liquidated damage equivalent of specific performance. 7. Property/liability issue: a. Specific performance or penalty clause is like a property rule-- you need the other party's permission to breach the contract. b. Expectation or reliance damages are like a liability rule o D. Fraud: Laidlaw v Organ 1. What happened: a. Purchaser of tobacco knew the war (of 1812)was over; nobody else did. b. Before to tobacco was delivered the news broke, seller tried to reneg on the deal c. The court didn't let him. 2. The benefits of the court's position: The ability of people who have
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This note was uploaded on 04/05/2012 for the course ECON 395 taught by Professor Beckett during the Fall '11 term at Rutgers.

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6 - If we do want to enforce the contract, how do you fill...

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