Otto-von-Guericke-University Magdeburg EFFICIENT BREACH OF CONTRACT. Individual Assignment. The Role of Damage Measures

Transcription

1 Otto-von-Guericke-University Magdeburg Faculty of Economics and Management PD Dr. Roland Kirstein Seminar: Law and Economics Individual Assignment EFFICIENT BREACH OF CONTRACT The Role of Damage Measures David Haag # Gutbrodstr Stuttgart Master of Intl. Business 8TH OF JANUARY 2007

2 Table of Content 1. INTRODUCTION EFFICIENT BREACH OF CONTRACT AND DAMAGE MEASURES INCOMPLETE CONTINGENT CONTRACTS AND INEFFICIENCY DAMAGE MEASURES AS SUBSTITUTES OF COMPLETELY SPECIFIED CONTRACTS EVALUATION OF DAMAGE MEASURES SUMMARY CRITICAL ISSUES FOR DAMAGE MEASURES TRANSACTION COSTS, DAMAGE MEASURES AND ALTERNATIVE CONTRACTUAL DESIGNS THE PROBLEM OF FULL COMPENSATION SUMMARY CONCLUSION REFERENCES II

3 1. Introduction On the level of economic transactions, contractual relations have emerged over time to govern behavior of people involved in doing business in order to promote the efficient allocation of scarce ressources. 1 Thereby, contracts create order, reduce uncertainty or transform uncertainty into risk and thus are basic premises allowing for the exchange of goods or services. 2 However, depending on the nature of the economic transaction, parties involved in a contractual agreement may prefer to grant breach of contract if it proves to be efficient compared to performing the contract throughout duration. Hence, in order to guarantee the mutual benefit and thus, in fact, pareto efficiency of breach of contract, contractual settings have to be designed sophisticatedly to account for situations, where a contractual party may want to default and breach a contract. Based on a paper by Steven Shavell, 3 in the following, damage measures shall be critically discussed as efficient coordination mechanisms of interests in the event of breach of contract. First of all, the need for contractual settings in order to promote efficient breach of contract given incomplete contingent contracting will be outlined. Then, a light shall be shed on the model of damage measures as used and introduced by Shavell. Thereafter, Shavell s approach shall be critically discussed and some further implications will be given. 1 See Macaulay (1963), pp See North (1991), pp ; See Dequech (2006), pp See Shavell (1980), pp

4 2. Efficient Breach of Contract and Damage Measures 2.1 Incomplete Contingent Contracts and Inefficiency Since the famous article The Problem of Social Cost by Ronald Coase, 4 the fundamental role of transaction costs for the contractual governance of economic relations has received a growing attention in the interdisciplinary domain of Law and Economics. Contracts do not only involve production costs thus the costs of executing a contract, but also transaction costs, which consist of the costs of arranging a contract ex ante and monitoring and enforcing it ex post 5. Under a regime of transaction costs, complete contingent contracting, providing for each contingency that could arise during contract duration thus being pareto efficient ex ante, proves to be impossible, especially if a contractual agreement is complex. 6 Complete contingent contracting would involve excessive contract negotiation and high information costs to verify and provide for the probability of every contigency perceivable and to ensure information symmetry between the players involved. 7 In fact, as players are subject to bounded rationality, information may even be exclusive to one party or generally not available. 8 As a result, contracts will not provide for any contingency and are therefore necessarily incomplete. Based on the assumption that contracts are necessarily incomplete, an unexpected contingency may arise after a contract has been agreed on, which alters the expected value of a party involved in the contractual agreement. As a result, unexpected contingencies may induce one party to defect and breach a contract at the other party s expense. 9 In this particular case, pareto efficiency with respect to breach of contract is violated, as one player will be worse off as compared to the preceeding allocation. Instancing, a simplified model shall be considered. It is supposed that seller S and buyer B join a contractual agreement. Under this contract, S is obligated to deliver a book to 4 See Coase (1960), pp Matthews (1986), p See Macaulay (1963), pp ; See Shavell (1980), pp ; See Williamson (1999), p See Eisenberg (2000), p See Radner (1968), pp ; See Shavell (1980), pp ; See Simon (1985), pp See Shavell (1980), p

5 B, while B is obligated to pay 4. Furthermore, S has to spend 2 as transportation costs if performing. The contract price has already been transferred from B to S. Before the book is delivered, an alternative buyer C offers seller A 8, if S would deliver the book to C. It is supposed that this contingency was not perceived when designing the contract. In this case, S will breach the contract as the potential gain of defaulting ( 8-2) clearly exceeds the gain of performing the contract ( 4-2). Contrariwise, B will be worse off as B already spent 4 as contract price and is not able to realize the full value of if the contract would have been performed, not anticipating C as an unexpected contingency. Hence, breach of contract is pareto inefficient. In order to avoid inefficient breach of contract and ensure pareto efficiency, several contractual countermeasures may be set, such as intrinsic rewards or the possibility of renegotiation. 10 In a paper by Steven Shavell, the vital role of an appropriate design of damage measures for breach performance is highlighted, which will be discussed in the following chapter. 2.2 Damage Measures as Substitutes of Completely Specified Contracts If liquidated damages, that is, damage measures are appropriately designed, they will create incentives for contractual parties to behave in a way that approximates what they would have explicitly agreed upon under a fully specified contract 11. Damage measures may hence serve as substitutes for completely specified contracts and thus provide for unexpected contingencies, which would imply efficient breach of contract. This is central to the program of Shavell s paper, as it is the underlying proposition of his analysis. In his model of damage measures, it is assumed that a risk neutral buyer and a risk neutral seller agree on a contract for the delivery and production of a certain good or for the performance of a service. Furthermore, it is supposed that both parties 10 See Murdock (2002), pp ; See Huberman/Kahn (1988), pp Shavell (1980), p

6 have agreed on a certain type of damage measure for breach of contract. The possibility of renegotiation or partial performance is not considered in the model. 12 Ex post the contract is ratified, both parties will decide simultaneously about whether they want to perform or whether they wish to default. Hence, both parties will try to maximize their expected value associated with the contract. If a party decides to perform, he will determine his level of reliance, which, according to Shavell, is defined as actions taken before and in anticipation of contract performance 13. This, for example, may include a seller s expenditures such as production costs or a buyer s specific investment into employee training. To determine his level of reliance, a party has to consider the probability of becoming a victim of breach as, in this case, the party may not realize the full benefits of reliance. Based on this calculation, the party will determine his level of reliance. 14 Now it is assumed that a party may exclusively observe a certain unexpected contingency and, based upon that, will decide to default. In this case, the party will default whenever his position, given breach of contract, will have more positive implications than if he was to stick to the contract. 15 Both the decision about reliance and the decision about breach are influenced by the damage measure that was agreed upon. On the one hand, the defaulting party will only default if the difference between his position, given breach and given a certain damage the defaulting party has to pay to the other party, and his position, given performance, is non-negative. 16 This breach set is rather straightforward. The defaulting party has to renounce the benefits of performance and pay damage depending on a certain damage measure, while receiving the benefits of breach under a certain contingency. Based on a non-negative cost benefit analysis, the party will default. Given this breach set, the damage measure hence sets disincentives for breach of contract by reducing the benefits of defaulting. 12 See Shavell (1980), pp Shavell (1980), p See Shavell (1980), pp See Shavell (1980), p See Shavell (1980), p

7 On the other hand, the relying party s decision about his level of reliance is also influenced by the damage measure. To begin with, the relying party may not be able to observe the unexpected contingency, but he is certainly aware of the nature of the damage measure. If the relying party understands the logic of the other party s breach set, which was outlined before, the damage measure helps to determine the probability of becoming victim of defaulting as the relying party is well aware of the amount the defaulting party has to pay to him. 17 Furthermore, depending on the damage measure at hand, the amount of damages paid to a victim of breach may e.g. be a function of reliance. In this case, the relying party is able to increase the potential damages to be paid to him by upgrading his level of reliance. As another effect, the relying party is thereby able to adversly influence the other party s breach set and reduce the probability of becoming victim of breach. 18 In order to ensure efficient breach of contract, it can therefore be distinguished between two functions of damage measures: the informative function on the one hand and the constraining function on the other hand. Referring to the former, damage measures have to be designed so that they help to identify the other party s breach set. Hence, uncertainty is transformed into risk and the probability of becoming victim of breach is decreased. With reference to the latter function, damage measures also have to be designed as such that they set disincentives for parties to default. On the one hand, the benefits of breach of contract may be directly reduced. On the other hand and maybe most importantly, damage measures may also force a party, who wants to default, to take into account the other party s benefits in order to serve his own interest. 19 Given an appropriate design, damage measures as well-defined contractual arrangements co-align the benefits of both parties and promote pareto efficiency of breach of contract. The design of damage measures is hence critical to fulfil the informative function as well as the constraining one to promote efficiency. In his paper, Shavell compares three 17 See Shavell (1980), p See Shavell (1980), pp See Shavell (1980), p

8 distinct designs of damage measures: 20 The (1) expectation measure, (2) the reliance measure, and (3) the restitution measure Evaluation of Damage Measures Under (1) the expectation measure, the defaulting party is obligated to put the relying party in the position he would have been in had the contract been completed. 22 Given the breach set as described in Chapter 2.2, a party will only default if his gain, which is defined as the difference between the benefits of defaulting and the benefits of performing, exceeds the expected value, if performing, of the other party. Under the expectation measure, breach of contract will hence be pareto efficient as breach will only occur if it rises the sum of the values enjoyed by both parties. 23 Hence, the expectation measure serves as a perfect substitute for complete contingent contracting with respect to breach of contract. Turning to (2) the reliance measure, this does not hold to be true. 24 Under the reliance measure, the defaulting party is obligated to put the relying party in the position he was in before he ratified the contract. 25 Hence, breach of contract will only occur if the gain of breach exceeds the reliance and the price that has been paid. Given that the level of reliance and the price necessarily have to be less than the relying party s expectancy, 26 contingencies may arise, which induce pareto inefficient breach of contract as the relying party would not be in the position he would have been in had the contract been performed. Therefore, the reliance measure may only partially serve as a substitute for complete contigent contracting thus efficient breach of contract. 20 The case of no damages hence when a defaulting party pays nothing, is also discussed in Shavell s paper. However, this shall not be discussed in this paper as the case of no damages is not seen as a damage measure. 21 See Shavell (1980), p See Polinsky (2003), p. 33; See Shavell (1980), p See Polinsky (2003), pp ; See Shavell (1980), p See Shavell (1980), p See Polinsky (2003), p. 34; See Shavell (1980), p See Shavell (1980), p

9 Under (3) the restitution measure, the defaulting party only has to compensate the other party for the payments made to him, but not for reliance. 27 In this case, the result is quite similar to what has been found under the reliance measure. Contingencies may arise, which induce pareto inefficient breach as the price will be necessarily less than the relying party s expectancy. 28 Therefore, the reliance measure may also only partially serve as a substitute for breach of contract under complete contigent contracting. These damage measures may be illustrated by considering a practical example. It shall be assumed that seller S and buyer B have signed a contractual agreement. Under this contract, S is obligated to produce and deliver a MP3-Player to B, while B is obligated to pay 100. Money has already been transferred from B to S, and B has invested 20 into new headphones. Hence, the value of the MP3-Player to B has to exceed 120, supposedly being 130. Before S starts to produce, he suddenly observes that his production costs will be 140. First, the expectation measure shall be considered. In this respect, S will only default if his gain of breach exceeds the expected value, if performing, of B. Given the information outlined, S will cancel the contract as the contingency exceeds the damages he has to pay to B ( 140 > 130). This would also be a pareto efficient breach as the sum of values enjoyed by both parties is increased in comparison to the preceeding allocation. Under the reliance measure, S will only breach the contract if his gain of breach exceeds B s level of reliance and the price B has been paid. Again, S will breach the contract as the gain of breach exceeds the damages he has to pay to B ( 140 > 120). In opposite to the case outlined before, this breach would not be pareto efficient since B enjoys less value in comparison to the preceeding allocation ( 120 < 130). This also holds to be true independently of B s level of reliance and the price B had to pay to S as the sum of the two necessarily has to lie below B s expected value, if performing. With regard to the restitution measure, it was outlined that S will breach the contract if and only if if his gain of breach exceeds the price B has been paid. Once again, S will breach the contract as the gain of breach exceeds the damages he has to pay to B ( This shall highlight the difference between the price and the expenditures that are taken after one party decided to rely. According to Shavell, the price may also be seen as part of the level of reliance. 28 See Shavell (1980), pp

10 > 100). Similar to the reliance measure case, this breach will, independent of the price S and B could have agreed on, not be pareto efficient since B enjoys less value than if the contract had been performed ( 100 < 130). As a result, the expectation measure is pareto superior to the reliance and restitution measure with respect to breach of contract and should therefore be preferred by relying parties. 29 In fact, the expectation measure stands out to be the only damage measure considered that may serve as a perfect substitute for efficient breach of contract under complete contingent contracting. 30 However, it has to be added that the expectation measure may induce an adverse side effect on the pareto efficient level of reliance, if one party just decides about reliance, but not about breach, while the other party just decides about breach. 31 As it is higlighted in Shavell s paper, the expectation measure in this case sets incentives for the relying party to excessively invest into reliance, exceeding the pareto optimal level. This can be attributed to the fact that, in opposite to terms of complete contingent contracting, the relying party is guaranteed his expectancy. 32 In this particular case, the expectation measure may not be a perfect substitute for complete contingent contracts thus not promoting optimal resource allocation, 33 but it certainly will be with respect to pareto efficient breach of contract under complete contingent contracting. 2.4 Summary In order to promote efficient breach of contract under the assumption of incomplete contingent contracts, damage measures, in particular the expectation measure, may be seen as appropriate contractual countermeasures. As it is outlined in Shavell s paper, damage measures shift incentive structures of contractual parties suchlike that the interests of both parties are co-aligned and, when choosing the expectation measure, pareto efficient breach of contract is mutually beneficial. However, as mentioned above, the expectation measure does not necessarily imply pareto efficiency of the level of 29 See Schwartz (1990), pp ; See Shavell (1984), p See Leitzel (1989a), pp See Shavell (1980), pp See Shavell (1980), pp ; See Sloof et al (2003), p See Shavell (1980), p

11 reliance, which may, under the expectation measure, but also the reliance measure, 34 exceed pareto efficiency. This can be seen as a trade-off between pareto efficient breach of contract and the pareto efficient level of reliance under a regime of an expectation measure. 3. Critical Issues for Damage Measures In the USA, the influencial American Law Institute (ALI), being a professional body of lawyers, recognizes the principle of reliance as fundamental to contractual liabilities though it may often not be appropriately enforced by judges. 35 As Yorio and Thel highlight, judges actually enforce promises rather than protect reliance 36. Hence, damage measures as a calculation basis for damages of breach of contract seem, in practice and if submitted to a court, to be mostly neglected. This may, on the one hand, be attributed to the problem of defining and identifying the level of reliance or expectancies, while on the other hand, this may also be attributed to the fact that pareto efficiency is often seen as the economic aspect of contractual agreements beside many other disciplinary dimensions, such as the psychological or ethical dimension, in order to achieve the goal of justice. 37 Regarding pareto efficiency of breach of contract, damage measure, however, may also prove to be inaccurate. Adopting a broader perspective on efficiency, two critical issues shall be discussed in the following. 3.1 Transaction Costs, Damage Measures and Alternative Contractual Designs As it was argued before, the efficiency of breach of contract merely referred to a pareto efficient outcome of two parties ex post breach of contract. However, contractual agreements comprise various costs, such as at the level of courts or during formation 34 See Shavel (1980), pp See Yorio/Thel (1991), pp Yorio/Thel (1991), p See Gardner (1984), pp ; See Kramer (1997), pp ; See Sadurski (1984), pp

12 negotiation. 38 As it was argued in Chapter 2.1, contracts involve transaction costs throughout the duration of a contract, defined as the costs of arranging a contract ex ante and monitoring and enforcing it ex post 39, which may widely differ with respect to the nature of an economic transaction. Hence, damage measure may promote pareto efficiency at the time of breach, but if compared to other contractual designs, they may also turn out to enhance costs over the full range of contract duration, such as pareto inefficient reliance. However, the flaw of overinvestment in reliance may be accounted for. Damage measures may be designed like this that they only compensate for a reasonable hence socially optimal level of reliance, which can either be part of the contractual agreement or a standard applied in court decisions. 40 Under this condition, a relying party is likely to choose a pareto optimal level of reliance. Still, reciprocal effects and defining the socially optimal level of reliance may again pose a problem. In assessing whether damage measures serve as efficient contractual designs, one hence has to consider carefully whether costs are minimized or whether costs are shifted e.g on other parties or onto another contractual point of time. As Ulen e.g highlights, specific performance, which is defined as judicial order requiring the promisor to perform his contractual promise or forbidding him from performing the the promise with any other party 41, may be a potentially beneficial alternative form of courtimposed remedy for breach of contract. Depending on the nature of the economic transaction, market-based remedies for breach of contract, such as reputation, 42 or different legal-based solutions may hence be pareto superior to damage measures The Problem of Full Compensation Considering the expectation measure, breach of contract may involve additional costs for the relying party, which are not accounted for in the damages paid to the relying party. This may, for instance, mean a loss of reputation 44 or severe emotional distress as 38 See Ulen (1984), pp Matthews (1986), p See Leitzel (1989a), pp ; See Leitzel (1989b), pp Ulen (1984), p See Ulen (1984), pp See Ulen (1984), pp See Enonchong (1996), pp

13 a result of bad faith breach 45. Accordingly, compensation, which is in line with the expectation measure, will not necessarily fully compensate victims of breach. 46 This may be especially the case, if a contractual party is not risk neutral, but risk averse. If the relying party has a disposition for risk aversion, he may be worse off under the expectation measure, as, if the case is submitted to a court, the judges will assume risk neutrality and therefore not account for the additional loss of a risk premium. 47 Regarding the problem that contracts may also serve to allocate risk, damage measures may as a countermeasure be accompanied by a fixed price or spot price contract for the good at hand to ensure against price fluctuations. 48 However, contractors may also have to consider carefully an appropriate contractual design as the problem of overinvestment in reliance may occur. The problem of not fully compensating victims of breach e.g for emotional distress refers to the potential requirement of good faith and fair dealing in contracts. This implies a more fundamental criticism as it is based on the idea of psychological or implicit contracts. 49 According to this model, contracts may comprise not only an explicit element but also an implicit one, which defines certain implicit obligations the parties have to fulfil. 50 An efficient breach of contract may therefore also depend on compensating for breach of trust. Whether claims for compensation are justified with respect to pareto efficiency may however largely depend on the nature of the economic transaction. For instance, insurance contracts are widely recognized to contain a covenant of fair dealing and good faith, which has been accounted for in tort law. 51 Similarily, breach of employment contracts may be subject to compensation for breach of trust. 52 From the perspective of a positive economic analysis of efficient breach of contract, tort liabilities may, on the one hand, hence have to be accounted for if assessing damage measures. 53 On the other hand, depending on the nature of an economic transaction, it may also be insufficient to align pareto efficient breach of 45 See Cohen (1985), pp ; See Curtis (1986), pp See Curtis (1986), pp ; See Rousseau/Tijoriwala (1998), p See Curtis (1986), pp See Polinsky (1987), pp ; See Shavell (1980), pp ; See Shavell (1984), pp See Cohen (1985), pp ; See Guest (1998), pp ; See Rousseau/Tijoriwala (1998), pp See Macaulay (1963), pp ; See Rousseau/Tijoriwala (1998), pp See Curtis (1986), pp See Chutorian (1986), pp See Chutorian (1986), pp

14 contract with expectancy as breach of trust may induce additional damage to the relying party, adversely affecting the party s position after breach and therefore detrimentally affecting pareto efficiency. 3.3 Summary To sum up, the model of damage measures as discussed in Shavell s paper may be considered not sufficient to account for a particular economic transaction. Introducing a contractual setting may induce reciprocity and thus may shift costs instead of reducing costs or may foster adverse behavior such as overinvestment in reliance. Furthermore, damage measures may not cover the full range of damages for victims of breach, in fact, breach of implicit contracts may e.g. produce liabilities in tort, which has to be accounted for if deciding about breach. However, adverse side effects may be avoided if additional contractual settings, compensating for loss of efficiency, are adopted. Compared to alternative contractual designs, damage measures may hence not necessarily serve as pareto optimal substitutes for complete contingent contracts. 4. Conclusion Under a regime of transaction costs, which necessarily implies incomplete contingent contracts, contractual parties have to adopt remedies, which account for unexpected contingencies, in order to approximate pareto efficiency in the event of breach of contract. As argued in Chapter 2, damage measures may serve as a countermeasure to avoid inefficient breach of contract and may even, regarding the expectation measure, serve as a perfect substitute for complete contingent contracts in the event of breach. Thus, contractual parties may apply damage measures to reduce uncertainty about the other party s behavior and thereby allow for mutually beneficial breach of contract. However, as argued in Chapter 3, a broader perspective on efficiency should be applied. In the event of breach of contract, damage measures may cause adverse reciprocal effects throughout the contractual process, increasing costs or decreasing a party s expected value. Given the underlying assumptions of Shavell s paper, damage measures may also not fully compensate a victim of breach, especially if players are not risk 12

15 neutral or contracts are imputed to contain a covenant of fair dealing and good faith. In this case, additional governance settings may be ineluctable to guarantee efficient breach of contract. In practice, the model of damage measures may nevertheless be mostly pareto superior to alternative contractual designs. Although they are often not acknowledged by judges, damage measures represent a remarkable alternative to other remedies in order to encourage pareto efficient breach of contract. 13

16 References Chutorian, S. (1986), Tort Remedies for Breach of Contract: The Expansion of Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing into the Commercial Realm, in: Columbia Law Review, Vol. 86, No. 2, pp Retrieved December 01, 2006, from JStor Database. Coase, R. H. (1960), The Problem of Social Cost, in: Journal of Law and Economics, Vol. 3, No. 1, pp Retrieved November 04, 2006, from JStor Database. Cohen, M. H. (1985), Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort, in: California Law Review, Vol. 73, No. 4, pp Retrieved November 27, 2006, from JStor Database. Curtis, L. (1986), Damage Measurements for Bad Faith Breach of Contract: An Economic Analysis, in: Stanford Law Review, Vol. 39, No. 1, pp Retrieved November 28, 2006, from JStor Database. Dequech, D. (2006), The New Institutional Economics and the Theory of Behavior under Uncertainty, in: Journal of Economic Behavior & Organization, Vol. 59, No.1, pp Retrieved November 27, 2006, from ScienceDirect Database. Eisenberg, M. A. (2000), The Emergence of Dynamic Contract Law, in: California Law Review, Vol. 88, No. 6, Symposium of the Law in the Twentieth Century, pp Retrieved November 29, 2006, from JStor Database. Enonchong, N. (1996), Contract Damages for Injury to Reputation, in: The Modern Law Review, Vol. 59, No. 4, pp Retrieved November 28, 2006, from JStor Database. Gardner, E. C. (1984), Justice, Virtue, and Law, in: Journal of Law and Religion, Vol. 2, No. 2, pp Retrieved November 30, 2006, from JStor Database. 14

17 Guest, D. E. (1998), Is the Psychological Contract Worth Taking Seriously, in: Journal of Organizational Behavior, Vol. 19, Special Issue: The Psychological Contract at Work, pp Retrieved November 27, 2006, from JStor Database. Huberman, G. / Kahn, C. (1988), Limited Contract Enforcement and Strategic Renegotiation, in: The American Economic Review, Vol. 78, No. 3, pp Retrieved November 26, 2006, from JStor Database. Kramer, M. H. (1997), Justice as Constancy, in: Law and Philosophy, Vol. 16, No. 6, pp Retrieved November 30, 2006, from JStor Database. Leitzel, J. (1989a), Damage Measures and Incomplete Contracts, in: The RAND Journal of Economics, Vol. 20, No. 1, pp Retrieved November 27, 2006, from JStor Database. Leitzel, J. (1989b), Reliance and Contract Breach, in: Law and Contemporary Problems, Vol. 52, No. 1, Economics of Contract Law, pp Retrieved November 26, 2006, from JStor Database. Macaulay, S. (1963), Noncontractual Relations in Business: A Preliminary Study, in: American Sociological Review, Vol. 28, No. 1, pp Retrieved November 25, 2006, from JStor Database. Matthews, R. C. O. (1986), The Economics of Institutions and the Sources of Growth, in: The Economic Journal, Vol. 96, No. 384, pp Retrieved November 27, 2006, from JStor Database. Murdock, K. (2002), Intrinsic Motivation and Optimal Incentive Contracts, in: The RAND Journal of Economics, Vol. 33, No. 4, pp Retrieved November 29, 2006, from JStor Database. 15

18 North, D. C. (1991), Institutions, in: The Journal of Economic Perspectives, Vol. 5, No. 1, pp Retrieved November 05, 2006, from JStor Database. Polinsky, A. M. (1987), Fixed Price versus Spot Price Contracts: A Study in Risk Allocation, in: Journal of Law, Economics, & Organization, Vol. 3, No. 1, pp Retrieved December 02, 2006, from JStor Database. Polinsky, A. M. (2003), An Introduction to Law and Economics, 3 rd Edition, Aspen Publishers, New York. Radner, R. (1968), Competitive Equilibrium under Uncertainty, in: Econometrica, Vol. 36, No. 1, pp Retrieved November 26, 2006, from JStor Database. Rousseau, D. M. / Tijoriwala, S. A. (1998), Assessing Psychological Contracts : Issues, Alternatives and Measures, in : Journal of Organizational Behavior, Vol. 19, Special Issue: The Psychological Contract at Work, pp Retrieved December 01, 2006, from JStor Database. Sadurski, W. (1984), Social Justice and Legal Justice, in: Law and Philosophy, Vol. 3, No. 3, pp Retrieved December 03, 2006, from JStor Database. Schwartz, A. (1990), The Myth That Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, in: The Yale Law Journal, Vol. 100, No. 2, pp Retrieved November 27, 2006, from JStor Database. Shavell, S. (1980), Damage Measures for Breach of Contract, in: The Bell Journal of Economics, Vol. 11, No. 2, pp Retrieved November 20, 2006, from JStor Database. Shavell, S. (1984), The Design of Contracts and Remedies for Breach, in: The Quarterly Journal of Economics, Vol. 99, No. 1, pp Retrieved December 03, 2006, from JStor Database. 16

19 Simon, H. A. (1985), Human Nature in Politics: The Dialogue of Psychology with Political Science, in: The American Political Science Review, Vol. 79, No. 2, pp Retrieved November 05, 2006, from JStor Database. Sloof, R. et al (2003), An Experimental Comparison of Reliance Levels under Alternative Breach Remedies, in: The RAND Journal of Economics, Vol. 34, No. 2, pp Retrieved November 29, 2006, from JStor Database. Ulen, T. S. (1984), The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, in: Michigan Law Review, Vol. 83, No. 2, pp Retrieved November 28, 2006, from JStor Database. Williamson, O. E. (1999), Strategy Research: Governance and Competence Perspectives, in: Strategic Management Journal, Vol. 20, No. 12, pp Retrieved November 25, 2006, from JStor Database. Yorio, E. / Thel, S. (1991), The Promissory Basis of Section 90, in: The Yale Law Journal, Vol. 101, No. 1, pp Retrieved December 02, 2006, from JStor Database. 17