efficient breach

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Quick question about efficient breach--i am not sure if this has already been discussed before; sorry if it has. i haven't completely caught up with all the posts yet.

as i understand it, we only award enough damages to put promisee in a position he would have been had the contract been performed, and the main idea behind that is that we want to give promisor incentives to breach when it's efficient.

if that's our only justification, why don't we allow the promisee to share in the profits that results from the breach? So when a promisor breaches efficiently, we can allow him to recover the costs of making the efficient breach (i.e. making the deal, etc.) and then split the rest of the profit between him and the promisee. i thought this case would preserve the ex-ante incentive for efficient breach and at the same time achieve a distributively more fair result? is it too formally unrealizable?

thanks, tawen

-- Anonymous, January 14, 1999


Basically, because then on the margin we get inefficiency. In a perfect market, there wouldn't be inefficiency, but to be honest, it is not clear what the distributional justification is (why is it more fair to split it? The added value is a windfall. Further, distributional justice would require us to take into account the parties' postitions independent of the K - so there's no way to generalize about which party, distributionally, deserves the windfall.)

Back to the question. Let's use the sale of a good as a hypo. I am selling for $50 - there's a K. Someone else offers $55. In a perfect mkt I can sell for $55 and split the extra $5, simple enough. In the real world, there are costs - transaction costs of arranging the $55 sale and of arranging the payoff of the $50 K, accounting costs in proving to the $50 breechee that I actually sold for $55 and they only get an extra $2.50, etc. Our goal is to get the item into the hands of the person who values it at $55 - that's efficient. Further, paying $50 leaves the breechee just as well off. So if sharing the windfall entails sufficient additional costs that some breechs are discouraged, we have inefficiency, without any justifiable gain to any party.

Don't forget the ex ante incentives for the seller - we want to reward the seller for finding the buyer who values the good the highest because that means the _buyer_, and theoretically society, is better off. Forcing him to share the social gain reduces his incentives...

-- Anonymous, January 14, 1999

Wow, that's a really great answer.

In terms of distributive justice though--do we _have_ to take the parties' position outside of the K into account? I guess I thought it'd be more distributively fair because, once the contract is made, the buyer would also seem to have some sort of possessory interest in the goods in question--a future interest or something. so he would have some interest in the profit made by selling the goods to 3rd party. (the one thing i can think of that kind of goes against this is the liability for loss, which seems to go with the seller until contract actually performed.)

-- Anonymous, January 14, 1999

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