| Abstract: | Contracts that involve the government differ from contractsbetween two private parties in that the identity of one of theparties, the government, is subject to change. Given that theincumbent government knows that it might not be in power whenthe contract is completed, it may have an incentive to structurethe contract to make it more difficult for a new governmentto renegotiate it. I show that traditional damage measures usedin contracts between two private parties exacerbate this problem.The reliance damage measure induces the incumbent governmentto enlarge projects beyond the socially optimal level when itfears that a new government will want to cut it back. Expectationdamages suffer from the same defect, though to a lesser extent. |
