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Journal of Law, Economics, and Organization Advance Access published online on October 21, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewp032
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Published by Oxford University Press on behalf of Yale University 2009. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Dynamic Contract Breach

Fan Zhang*

US Department of Justice

* Economic Analysis Group, Antitrust Division, US Department of Justice, Washington, DC, USA. Email: fan.zhang{at}usdoj.gov.

This article studies the design of optimal liquidated damages when breach of contract is possible at multiple points in time. It offers an intuitive explanation for why cancellation fees for some services (e.g., hotel reservations) increase as the time for performance approaches and discusses the incentives to mitigate damages. It is shown that absent externalities, privately stipulated damages induce socially efficient breach and investment decisions, regardless of whether renegotiation is possible. (JEL K12)


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