Abstract: | 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 seller s breach, a high enough up-front payment to ensure that the seller does not sue, and a high enough trading price to ensure the buyer s breach when the undesirable state occurs. Edlin s device (1996), which has a very low trading price to assume away the buyer s 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. |