What is the condition for breach from a socially efficient

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Reference no: EM133287321

(1) Suppose Party A is selling a good to Party B, but the contract has bilateral reliance investments, meaning both Party A and Party B make investments {R!, R"}. The contract specifies, then, that if a party breaches, they must pay damages {D!,D"} to the harmed party, where D! go to Party B and D" go to Party A, which are zero otherwise. Suppose ?? is the value of the contract to Party B, ?? is the
cost of production to Party A, and P is the negotiated price.

(a) Set up the table of payoffs for both parties in the case of performance and breach.
(b) What is the condition for breach from a socially efficient perspective?
(c) When will Party A breach? What should the court set D! equal to in order to achieve efficient breach?
(d) When will Party B breach? What should the court set D" equal to in order to achieve efficient breach?

Reference no: EM133287321

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