Handout for Econ 522, Fall 2009, Disc #6, 10/16
1. Parodox of compensation (do not worry about the math in this question)
Efficient Reliance: let’s continue the example of the airplane. The buyer values the airplane at
$500,000, the seller’s cost normally is $250,000 and may go up to $1,000,000 with probability p.
The price is set to $350,000. In addition, whenever the buyer invest $x in building the hanger, his
benefit from it will go to 600 x . And the investment will be wasted if the airplane is not delivered.
a. use words to explain why expectation damages not covering reliance give the correct
incentive for efficient reliance by the buyer, while expectation damages covering reliance does
not.
b. show mathematically the above result without solving for x.
c. explain the parodox of compensation
2. Default Rules
--fill in the gap
--Penalty Default
--Majoritarian Default: most party would have agreed upon
--efficient bearer of risk: see e.g. 1 below
--Regulations/ Mandatory Rules: market failure, examples? eeexxxttteeerrrnnnaaallilitittiieieesss
3. Formation Defense: defendents can claim that they have no legal obligation to the plaintiff
because no contract exist between them. A formation defense asserts that the conditions for
creating a contract were no satisfied.
Performance Excuse: defendants can concede that a contract exists, and then claim that
they were excused from performing under the circumstances. A performance excuse admits the
existence of a contract and denies liability for breach.
--Which of the above two does each of the following belong to?
a. Incompetence
if the contract is in favor of the incompetent, could be enforceable
b. Dire Constraints and Remote Risks
Duress—Actively Destroy value
on renegociation: “In general, courts do not enforce contract renegociations motivated
by the increase in the promisor’s bargaining strength that results from the promisee’s
reliance.”
Necessity—Inaction
Efficient activity and Efficient rescue, especially if the rescue is fortuitous.
c. Derogation of public policy:
negative externality towards people outside the contract
e.g. 1. A manufactorer argue that she is excused from dilivering the promised goods because her
factory burned down. Who should bear this risk? What if it is done by the Joker?
e.g. 2. A young girl found an “attractive stone” and sold it to a jeweler for $1. Later her family
found out it’s actually a rough dimond worth $700. What doctrine can be used to void the
contract?
e.g. 3. Mr. Robinson was sailing and saw a storm coming his way. He went to an island nearby and
lookded for help. Mr. Friday on the island didn’t know about the storm, and pointed a gun at Mr
Robinson and ask him to sign a contract to give the boat to Mr. Friday.