chapter  9
On Breach Remedies: Contracting with Bilateral Selfish Investment and Two-Sided Private Information
BySugata Bag
Pages 38

Introduction In this essay, we shall be presenting a model involving two-sided informational asymmetry and bilateral selfish investments. To introduce the analysis, suppose that two risk-neutral parties come together to exchange a specific commodity in the future. Both the parties invest in their respective valuations and costs, which enhance the social surplus when they trade. At the beginning, the parties know their respective distributions from which the values of the relevant parameters related to their valuations will be drawn. The parties individually learn the respective true valuations only after they invest; but these values are neither observable to the other party nor verifiable to the court and are, thus, private information. The parties will then continue their venture if the market favours the commodity, that is, if they can produce it at a particular cost and exchange it at a particular (predefined) price. Otherwise, disputes arise and they settle it in a court.