Aaron S. Edlin,
Cadillac Contracts and Up-front Payments: Efficient Investment under Expectation Damages, 12
J.L. Econ. & Org.
Available at: http://scholarship.law.berkeley.edu/facpubs/112
This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980), by controlling which party breaches a contract. At the same time, "Cadillac" contracts (contracts for a very high quality or quantity) can protect against underinvestment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well-suited to multidimensional but one-sided investment problems, in contrast to specific performance, which is well-suited to two-sided but unidimensional investment problems.