TY - JOUR
T1 - Information acquisition activity and damage measures
AU - Kim, Jeong Yoo
AU - Rhee, Kyoungwon
PY - 2006/12
Y1 - 2006/12
N2 - We examine the effect of various damage measures on the buyer's information acquisition efforts when the buyer can learn a signal about the production cost after a contract. We find that contrary to standard results, liquidated damages induce neither efficient performance nor efficient reliance, if a buyer decides to learn the signal, and that they do not provide a buyer with the incentive to acquire information. Thus, if acquiring information is costly enough, liquidated damages yield the highest social welfare among various damage measures, but otherwise, no damages, providing the incentive to acquire information, may perform better.
AB - We examine the effect of various damage measures on the buyer's information acquisition efforts when the buyer can learn a signal about the production cost after a contract. We find that contrary to standard results, liquidated damages induce neither efficient performance nor efficient reliance, if a buyer decides to learn the signal, and that they do not provide a buyer with the incentive to acquire information. Thus, if acquiring information is costly enough, liquidated damages yield the highest social welfare among various damage measures, but otherwise, no damages, providing the incentive to acquire information, may perform better.
UR - http://www.scopus.com/inward/record.url?scp=33846126887&partnerID=8YFLogxK
U2 - 10.1628/093245606779252661
DO - 10.1628/093245606779252661
M3 - Article
AN - SCOPUS:33846126887
SN - 0932-4569
VL - 162
SP - 543
EP - 556
JO - Journal of Institutional and Theoretical Economics
JF - Journal of Institutional and Theoretical Economics
IS - 4
ER -