Consider a contractual setting in which the technology of the relationship is given by the following partnership game:
Suppose the players contract in a setting of court-imposed breach remedies. The players can write a formal contract specifying the strategy profile they intend to play; the court observes their behavior in the underlying game and, if one or both of them cheated, imposes a breach transfer. The players wish to support the investment outcome (I, I)
(a) Write the matrix representing the induced game under the assumption that the court imposes expectation damages. Can a contract specifying (I, I) be enforced? Explain your answer.
(b) Write the matrix representing the induced game under the assumption that the court imposes restitution damages. Can a contract specifying (I, I) be enforced?
(c) Write the matrix representing the induced game under the assumption that the court imposes reliance damages. Can a contract specifying (I, I) be enforced with reliance transfers? Explain your answer.
(d) Suppose litigation is costly. When a contract is breached, each player has to pay a court fee of c in addition to the reliance transfer imposed by the court. What is the induced game in this case?
(e) Under what condition on c can (I, I) be enforced with reliance transfers and court costs?
(f) Continue to assume the setting of part (d). Suppose the court intervenes after a breach only if the plaintiff brings suit. For what values of c does the plaintiff have the incentive to sue?
(g) How does your answer to part (e) change if the court forces the losing party to pay all court costs?