Cooperative Investments Induced by Contract Law

This paper revisits the economic analysis of contract law for a setting of cooperative investments. While Che and Chung (1999) have shown that expectation damages perform rather poorly, the present paper argues that this negative result follows from their impicit assumption of unilateral expectation damages. Yet, the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages. It is shown that such a regime of bilateral expectation damages provides the incentives for the first best solution even in a framework of binary choice where, for selfish investments, the traditional overreliance result would hold. JEL classification: K12, D62 ∗The author wants to thank two referees as well as the editor in charge of this paper for helpful comments. All remaining errors are of course mine.