Handout for Econ 522, Fall 2009, Disc #7, 10/23
0. Bargain Theory
see Q1 in HW#2
1. Efficiency in Contract Law
1.1 Parodox of Compensation
--Breach
--Investment of Performance
--Reliance
1.2 Timing of Breach
e.g. a seller promised to supply 1,000 widgets by July at $2, the seller informed the buyer in
April when the price is $3 that he will no longer deliver the goods. In July the price has gone up to
$4. How much should the seller compensate the buyer?
2 Enforcing contracts
--generally, voluntary trades create social surplus, are pareto improvement
--Uniting knowledge and control, e.g. sell a house with termites
--productive information
--penalty default (disclose information, address risks), majoritarian default rule
3. Formation Defense and Performance excuse
Incompetence;
Duress and Necessity (see Q3 in HW#2);
Derogation of public policy
fraud; mutual mistake (see Q4 in HW#2);
frustration of perpose;
Impossibility
(Efficient Bearer of risks: spread, influence, aware of risks)
3. Some Concepts in Property Law
Normative Coase VS Coase Theorem
Injuntive Relieve VS Damage Rule
Gov Taking VS Regulatory Taking
Establish argument for efficiency
4. Remedy for Breach of Contract
Question (page 255)
Buyer B pays $10,000 to New Orleans grain dealer D in exchange for D’s promise to deliver grain to buyer B’s
London office on October 1. As a result of signing this contract, B decides not to sign a similar contract with
another dealer for $10,500. D contracts with shipping company S to transport the grain. Buyer B agrees to resell
the grain on arrival in London for $11,000 to another party. B pays $100 in advance (nonrefundable) as docking
and unloading fees for the ship’s projected arrival in London.
The ship begins taking water serveral days out of New Orleans and returns to port. Inspection reveals that the
grain is badly damaged by salt water, and D sells it as cattle fodder for $500. D conveys the news to B in London,
who then purchases the same quantity of grain for delivery on October 1 at a price of $12,000.
Question: How would you measure expectation damages, reliance demages and opportunity-cost damages
for D’s breach of contract with B?