Information acquisition activity and damage measures

Jeong Yoo Kim, Kyoungwon Rhee

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)543-556
Number of pages14
JournalJournal of Institutional and Theoretical Economics
Volume162
Issue number4
DOIs
StatePublished - Dec 2006

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