ECON451 Lecture Notes - Lecture 4: Expectation Damages, Externality

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9 Aug 2016
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Lecture #4 20:45
Reliance
- investments or expenditures made before the completion of the contract
(relying on that the contract will be fulfilled)  the more reliance the more
valuable the completion of the deal is.
B’(r) > 0  benefit you receive increases as reliance increases
What happens to expectation damages when dealing with reliance?
Case of NO externality
- Single individual
- Suppose P is the probability that the project is completed
Max r  pB(r) – r
pB’(r) = 1
Now, expectation damages
Max r  pB(r) + (1-p)*B(r) – r
Max r  B(r) – r
B’(r) = 1  too much reliance
Reliance Damages
- award r
- give breached against party an amount that restores them to where
they where
- Good when lots of opportunity to sign a new contract
Negligent omission.
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