Efficiency of Damage Measures under Team Contract

In this paper, we analyze the efficiency of major damage mesures such as ED, RD, and HED in a team contract situation; a buyer makes a contract with a team of more than one seller. When there are more than one seller in a team, under damages, individual seller only partially internalizes the loss he incurs to the whole society. Therefore, sellers in a team should have incentives to free-ride and invest less in precautions than under the single agent situation. This is the main effect of a team contract, being compared with the standard bilateral contract. Some major new finding in a team contract are as follows: ED induces under-performance, not efficient one. Furthermore, due to the same free-rinding incentives among sellers in the same team, the under-performing problem of RD is aggravated. Such property also affects the efficiency of HED, which is known as the perfect damage measure in a standard bilateral contract, so that even HED induces under-performance: however, the reliance of the buyer might be effient or inefficient depending on how we define HED.