Up-front payment under RD rule

This paper explores the effect of an up-front payment to contracts under the reliance damage measure. We find that the efficiency in most cases fails, but can be obtained by a high enough total payment to assume away the sellers breach, a high enough up-front payment to ensure that the seller does not sue, and a high enough trading price to ensure the buyers breach when the undesirable state occurs. Edlins device (1996), which has a very low trading price to assume away the buyers breach and a proper up-front payment to entice the seller to sign, fails to achieve the efficiency under the reliance damage measure.Received: 1 May 2002, Accepted: 15 May 2004, JEL Classification: K12, L00, D21Ho-Chyuan Chen: I wish to thank an anonymous referee of this journal for valuable comments.