We show that parties in bilateral trade can rely on the default common law breach remedy of 'expectation damages' to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a...

I consider a canonical bilateral trade setting in which the agents can exert non-verifiable investments, before they play a revelation mechanism and subsequently advance to the trading stage, where they take nondurable actions. Watson (2007) has demonstrated in a similar setting that the set of...

A loss averse buyer and seller face an uncertain environment. Should they write a long-term contract or wait until the state of the world has realized? I show that simple long-term contracts perform better than insinuated in Herweg and Schmidt (2015), even though loss aversion makes...