Standard Breach Remedies, Quality Thresholds, and Cooperative Investments

When investments are non-verifiable, inducing cooperative investments with simple contracts may not be as difficult as previously thought. Indeed, modeling “expectation damages ” close to legal practice, we show that the default remedy of contract law induces the first best. Hence, there is no need for privately stipulated remedies. Yet, in order to lower informational requirements of courts, parties may opt for a "specific performance " regime which grants the breached-against buyer an option to choose "restitution " if the tender’s value falls below some (arbitrarily chosen) quality threshold. In order to implement this regime, no more information needs to be verifiable than is implicitly assumed in Hart and Moore (1988)