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To see how much A receives or pays B to achieve the efficient outcome, take Ñ 

- Y àf the potential for a cooperative surplus exists and if agents are 7 Y à     
 (i e bargaining is likely to succeed)
now successful at achieving a bargain (the cooperative solution)     

then a more efficient result is reached         
2 Y Bargaining will fail if there is no cooperative surplus remedies are more superior than damages remedy because there
3 Y The law is unnecessary or inefficient in cases where bargaining should be misunderstanding concerning who has what property
can succeed But, in situations where private bargaining fails, the rights, and less uncertainty in situations in which a court must
only way to ensure an efficient allocation of resources is through assess damages
the law The law needs to ensure efficiency by assigning the 8 Y à         (hence less chance of bargaining
property rights to the party that values them the most (Normative succeedingO    

Hobbes Theorem) though property rights are clearly assigned and straightforward,
4 Y As the cooperative surplus gets larger, the lower are the joint the parties will not pursue cooperation through bargaining
profits under the remedy ruling (the sum of non cooperative 9 Y aonditions under which aoase Theorem is likely to hold:
solution) a Y nly 2 parties
5 Y The size of the cooperative surplus is a measure of how inefficient b Y roperty rights are well defined
the initial assignment of rights/ remedy is The larger the c Y Each party has perfect knowledge of other party¶s threat
cooperative surplus, the most inefficient the initial assignment of value, etc
rights d Y Bargaining takes place within a perfectly competitive
6 Y àf    
       , there is no point in framework
bargaining because all the cooperative surplus goes towards e Y No transaction costs
paying for the transaction costs of parties f Y Agents do not engage in strategic behavior that may break
down bargaining


8 Y ‘eliance is efficient/ optimal when

- Y Economic efficiency dictates enforcing a promise if both the promisee and
promisor wanted the promise enforced at the time it was made
2 Y aontract law should facilitate cooperation by gconverting games with non- $à   
  %&'(O )
cooperative (inefficient) outcomes to games with cooperative (efficient) $c 
     O " $à         
outcomes %&(O)$c 
3 Y An efficient outcome maximizes the joint return of the two parties
9 Y Expected gain > Expected loss, then rely more Expected gain  Expected
 loss, then rely less
4 Y The higher the price of breaching, the stronger the promisor¶s commitment - Y ptimal reliance is high when performance is certain, and optimal reliance
to perform is low when performance is uncertain
5 Y àf
    is the promisor¶s only concern, then: -- Y    * #      

àf the promisor¶s cost of performance of contract ! promisor¶s liability for
breach, then the promisor will breach (p*)(Sum of payoff for performance + low reliance) + (--p*)(Sum of
payoff for breach + low reliance)
àf the promisor¶s cost of performance of contract ! promisor¶s liability for
6 (p*)(Sum of payoff for performance + Hà H reliance) + (--p*)(Sum of
breach,then the promisor will perform payoff for breach + Hà H reliance)
6 Y The efficient rule for determining when a promisor is allowed to breach is: - Y à *,
           -./ à  
àf promisor¶s cost of performance of contract > promisee¶s benefit from

performance, then efficient to breach
àf promisor¶s cost of performance of contract < promisee¶s benefit from ‘

performance, then efficient to perform!
-3 Y aps left in contracts are µrational gaps¶ if
oY à





cÊ 2- Y Expectation damages are always efficient, while specific performance
might or might not be efficient, depending on the transaction costs
-Y c0   # 
    #    22 Y àn both fortunate (a better deal comes along and breach becomes more
        profitable) and unfortunate (cost of performing increases and breach is
-5 Ynder ED, the promisee gets the same return whether promisor breaches more profitable) contingencies,         

or performs, hence is indifferent between breach and performance c0          
-6 Y c0
 This is because ED allow the party that breaches to decide
-7 Y„or example, ED  
          when whether or not to breach, while specific performance grants the innocent
unforeseen performance costs arise   party the right to insist on performance nder specific performance, the
-8 YED    

    arties realize that the breaching party now has to µbuy¶ the right to breach from the innocent
promisor will perform when it is efficient to do so, and will not perform party through sharing the cooperative surplus obtained through breaching
when performance would be inefficient 23 Y ED cause 

-9 Y Ú
  , ED becomes (expectation damages + optimal reliance) while reliance damages cause
= promisee¶s original investment + expected profit from performance + partial internalization of the promisee¶s loss (optimal reliance)
optimal reliance (what is optimal depends on the probability of contract 24 Y ED can simultaneous provide for efficient incentives to the promisor and
being fulfilled) the promise:
2 YHowever, ED are generally difficult to determine in practice, especially a Y romisor is liable for expectation damages and optimal reliance
when the promise is vague damages
b Y romisee is liable for any over-reliance