A buyer wants to purchase an innovative good from a seller. Both parties are risk-neutral, and payments from the buyer to the seller must be non-negative. After the contract is signed, the seller privately observes a signal, which may be informative about the seller’s costs. We compare two contracting regimes. In the case of specific performance, the courts enforce the trade level specified in the contract. In the case of at-will contracting, the seller is free to walk away from the contract after the signal has been realized. While the buyer prefers specific performance and the seller prefers at-will contracting, the optimal regime from an economic efficiency point-of-view depends on the informativeness of the signal.
Schmitz, Patrick W, How (Not) to Purchase Novel Goods and Services: Specific Performance Versus At-Will Contracts (2022). Economic Journal, volume 132 (2022), https://doi.org/10.1093/ej/ueac024.