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Contract Structure For Joint Production: Risk And Ambiguity Under Compensatory Damages, Michael D. Ryall, Rachelle C. Sampson
Contract Structure For Joint Production: Risk And Ambiguity Under Compensatory Damages, Michael D. Ryall, Rachelle C. Sampson
Michael D Ryall
We develop a model in which the parties to a joint production project have a choice of specifying contractual performance in terms of actions or deliverables. Penalties for noncompliance are not specified; rather, they are left to the courts under the legal doctrine of compensatory damages. We analyze three scenarios of increasing uncertainty: Full Knowledge - where implications of partner actions are known; Risk - where implications can be probabilistically quantified; and, Ambiguity - where implications cannot be so quantified. Under Full Knowledge, action requirements dominate: they always induce the maximum economic value. This dominance vanishes in the Risk scenario. …