Essays in Law and Economics

Abstract

The first two chapters of this thesis are situated in a branch of the literature that is most often referred to as the economic analysis of contract law. This literature, that perhaps began blooming with the seminal work by Shavell (1980), considers the performance of contracts against the background of so called legal breach remedies. A breach remedy constitutes a standard legal rule that determines the consequences of a breach of contract. The third chapter is situated in the economic analysis of eminent domain and considers the efficiency of standard compensation regimes in a situation where a landowner faces the risk that a government may take her or his property ex-post.<br /> In the first chapter, we show that parties in bilateral trade can rely on the default common law breach remedy of expectation damages to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a sufficiently high quality level. In contrast, the result by Che and Chung (1999) that reliance damages induce the first best in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality specified in the contract is too low, expectation damages do not necessarily induce the ex-post efficient trade decision in the presence of cooperative investments.<br /> The second chapter examines the efficiency of the standard breach remedy expectation damages in a setting of bilateral cooperative investment by a buyer and a seller. Contracts may specify a required quality level and an upper bound to the cost of production. We find that it is optimal to write an augmented Cadillac contract that sets one threshold such that it cannot be met with positive probability together with an extreme price. Then, one of the parties becomes a residual claimant of the trade relationship. The remaining threshold can be used to balance the incentives of the other party.<br /> The analysis of the third chapter focuses on a situation where a landowner and the government invest prior to the government's taking decision. When the government suffers from budgetary fiscal illusion, optimal compensation amounts to the hypothetical value of the landowner's property had she invested efficiently. In contrast, under a government that maximizes social welfare, the only regime to induce the first best grants as compensation the social benefit of the taking. Consequently, if the government can only raise capital up to a certain amount, society may be better off under a non-benevolent government.