Damage measures for inadvertant breach of contract

Abstract

We analyze contractual situations where breach is inadvertant rather than deliberate. We consider the effects of alternative remedies for breach on ex ante precaution and reliance decisions. Neither the expectation measure nor the reliance measure of damages induces efficient precautions and reliance. The expectation measure leads to excessive reliance, while the reliance measure leads to excessive reliance and less than efficient precaution. The expectation measure, however, is Pareto-superior to the reliance measure. This result is robust to various informational assumptions. © 1999 by Elsevier Science Inc.