Daniel Göller

Economic Analysis of Taking Rules: The Bilateral Investment Case

Our analysis focuses on a situation where a landowner and the government invest prior to the governments taking decision. When the government suffers from budgetary fiscal illusion, optimal compensation equals the hypothetical value of the landowners property had she invested efficiently. In contrast, under a government that maximizes social welfare, this regime may fail to induce the first best. This insight stands in contrast to the literature, e.g., Miceli (1991), where this regime has been shown to induce the socially optimal solution.

Expectation Damages and Bilateral Cooperative Investments

We examine the efficiency of the standard breach remedy expectation damages in a setting of bilateral cooperative investment by a buyer and a seller. Contracts may specify a required quality level and an upper bound to the cost of production. We find that it is optimal to write an augmented Cadillac contract that sets one threshold such that it cannot be met with positive probability together with an extreme price. Then, one of the parties becomes a residual claimant of the trade relationship. The other threshold can be used to balance the incentives of the other party.

Contract, Renegotiation, and Holdup: When Should Messages Be Sent?

I consider a setting of complete but unverifiable information in which two agents enter a contractual relationship to induce mutually beneficial investments. As my main result, I establish that the famous irrelevance of contracting paradigm, that arises due to the detrimental effect of renegotiation, is resolved if there is a fixed point in time when actions have to be chosen and one accounts for the fact that renegotiation takes time. What drives my optimality result is that, by stipulating when the mechanism is to be played, the agents ensure that renegotiation is possible ex ante but not ex post.