The Efficient Breach Fallacy

Free riders, holdouts, and public use: a tale of two externalities

“…The Court's effort to 24 See Friedmann (1989) and Ulen (1984) who argue for the superiority of specific performance (a property rule) over money damages (a liability rule) in breach of contract cases, given the generally low transaction costs between parties to a contract. …”

Contract remedies: general

“…After the promisor's costs are revealed, the parties will renegotiate to reach the effi cient breach/perform decision no matter what incentives the damages rule provides. Some critics have therefore argued that much of the literature on damage remedies is beside the point, as the choice of remedies should be informed principally by an analysis of transaction costs (see Friedmann, 1989;Macneil, 1982). Friedmann analyzes potential transaction costs in a variety of contractual settings and argues that overcompensatory remedies (remedies that provide compensation to the promisee in excess of the expectation interest) will generally be effi cient.…”

“…It seems plausible that courts have not tried to alter damage measures to accommodate risk aversion (except to the extent specifi c performance can do so, as discussed in Section 10 below) because of the administrative and error costs that would result. Friedmann (1989) and Macneil (1982) argue that a better understanding of the costs of post-contractual renegotiation is necessary for making efficient remedial choices. While this point is correct, it is also worth paying attention to the eff ect of remedies on pre-contractual negotiations.…”

The use of economics for understanding law: An economist’s view of the cathedral

“…Thus, the conditions for property rule protection of the promisee's right to performance would seem to be present. In this view, the remedy of specific performance, essentially an injunction ordering performance, is preferred to money damages because it would allow the promisee to bargain with the promisor over the terms for non-performance (Ulen, 1984;Friedmann, 1989). In other words, breach of contract cases would appear to be better placed in cell I than cell II.…”