Cadillac Contracts and Up-front Payments: Efficient Investment Under Expectation Damages

This article shows that up-front payments can eliminate the overinvestment effect identified by Shavell (1980), by controlling which party breaches a contract. At the same time, “Cadillac” contracts (contracts for a very high quality of quantity) can protect against underinvestment due to Williamsonian holdups. This combination provides efficient investment incentives when courts use expectation damages as a remedy for breach. The expectation damages remedy is therefore well7ndash;suited to multidimensional but one-sided investment problems, in contrast to specific performance, which is well–suited to two–sided but unidimensional investment problems.