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Getting Incentives RightImproving Torts, Contracts, and Restitution$
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Robert D. Cooter and Ariel Porat

Print publication date: 2014

Print ISBN-13: 9780691151595

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691151595.001.0001

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Decreasing Liability Contracts and the Assistant Interest

Decreasing Liability Contracts and the Assistant Interest

(p.128) 8 Decreasing Liability Contracts and the Assistant Interest
Getting Incentives Right

Robert D. Cooter

Ariel Porat

Princeton University Press

This chapter proposes a novel mechanism to solve the promisee's incentive problem: decreasing liability contracts. Compared to constant liability, a decreasing liability contract typically improves incentives for two reasons. First, in many circumstances, the promisor will breach or perform depending on which is cheaper. Second, the promisee can often increase the probability of performance or lower its costs by assisting promisor. When performance occurs in phases and promisor needs promisee's assistance, a decreasing liability contract usually increases the contract's value relative to a constant liability contract. The assistance interest refers to the promisor's interest in securing assistance from the promisee. The chapter first describes the basic model of phased contracts with promisee's assistance before discussing surprises, along with progress payment contracts and timing of payments. It also explains how renegotiations affect decreasing liability contracts and how to identify contracts in which efficiency requires decreasing liability.

Keywords:   decreasing liability contracts, incentives, performance, assistance, assistance interest, phased contracts, surprises, progress payment contracts, renegotiations

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