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The Expectation Remedy Revisited (with Alan Schwartz), 98 Virginia Law Review 1093 (2012)


WE that recently analyzed published the standard an article contract in the remedies Virginia for Law breach Review and asked how those remedies relate to the theory of efficient breach. The Review commissioned two responses to our article, and it gen- erously offered to let us reply to those responses. We are grateful to the two responders for taking our work as seriously as they did and for helping us to clarify our claims. Those claims, however, continue to hold. Before discussing the responses, it is helpful to rehearse what we argued previously. Our formal analysis assumed: Al : Contracting parties are sophisticated and rational. A2 : Parties make the contractual choices that maximize their ex- pected profits. A3: The applicable legal system permits parties to contract for any remedy in the feasible set - expectation damages, specific per- formance, or disgorgement. A4: Parties can verify all relevant economic variables to the court. These four assumptions, we showed, implied that each of the possible remedies has the same efficiency and distributional properties, gross of contracting and renegotiation costs. In particular, parties trade only when trade is efficient under all of the remedies and the parties' payoffs (in money), again gross of contracting and renegotiation costs, are the same under all of them. When those costs are taken into account, the parties' net payoffs under the ex- pectation remedy (again in money) exceed the net payoffs that the other remedies yield. When A4 fails to hold, however, specific per- formance yields the highest payoff.

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