Optimal Damages under Participation Constraints

We design a comprehensive‘optimal damages’(OD) scheme which can elicit‘voluntary participation’from contracting parties as well as‘optimal behavior’. Particularly, the necessity to consider explicitly participation constraints has been motivated from the well-praised‘perfect expected damages’(PED). Such constraints for PED are shown to be more critical than commonly presumed. OD is then utilized to re-examine, in a fairly unified manner, the properties of popular measures in the literature. Above all, it is formally proven that PED can fail to induce promisor’participation; in that case, PED should have no efficiency implication. A few other interesting findings are confirmed such as the fragility of the efficient-performance feature under expectation damages and a likelihood of efficient breach under reliance damages. Finally, we demonstrate that