PASOS Y COSTOS PARA LA LIQUIDACIÓN VOLUNTARIA DE LOS VEHÍCULOS

If the performace decision was the only relevant decision, things would be easy.

To maximise common good, one would set the decommitment fee equal to the opponent’s losses and it would only be a problem of getting that fee close enough

27The applicability of this doctrine is very limited under English law. In many other ju-risdictions there is a similar but usually a wider doctrine of force majeure, which allows non-performance without damages in case of war, strike or other similar circumstances that could not be foreseen, won or bypassed with reasonable costs. Once the problem is removed, the per-formance must be made. However, the opponent is usually in these situations given a right to withdraw from the contract without any damages. Another doctrine of (economic) hardship may allow a free decommitment or one with partial damages, if the cost of performance has increased significantly. This usually requires a very significant change that could not be anticipated or avoided. As explained earlier (in the beginning of section 2.2.2.2), renegotiation is usually a preferred means to deal with these situations.

to the actual losses under incomplete information. However, that is not the whole story. As mentioned, there are other decisions to consider.

The optimality of the full expectation damages decommitment policy assumes that there is already a contract (the price is set), that the losses of the other party are fixed and that this party is unable to influence these costs. However, in many situations this may not be the case, but on the contrary, the party may have a strong impact on its costs and expected profits. To see this, let us consider the situation from the other side: When a party makes a performance decision on whether or not it will perform itself, the other party makes a reliance decision to decide how much to rely on the other party’s performance.

In more detail, the party shows its reliance on the opponent’s performance by taking actions that enhance the value of this future performance. Such preparation might involve, for example, getting complementary services, such as booking a coach ticket to the airport in anticipation of an airline providing a trip somewhere nice or getting a good bottle of wine to accompany a nice meal that somebody has offered. The preparation could also mean making changes to or configuring one’s equipment to best take advantage of the performance, like getting a manufacturing plant ready to make product A as soon as the raw material B arrrives. Also in a more abstract form, preparation might mean turning down alternative plans like not taking a job A because one is expecting to work on a job B at that time, and so on. Also the seller makes a reliance decision and can have plans for the renumeration he is expecting from the buyer.

Now, in many cases such preparations can be useful (beneficial reliance (Goetz and Scott 1980)).²⁸ For example, it is good to have a coach ticket in advance, so that one can be relatively certain to make it on time to the airport (no need to worry, if there is room on the coach). It can also mean that one can avoid more expensive last-minute options, like taking a taxi to the airport. A meal can be enhanced with a good wine increasing the value of the meal itself. Making the changes to one’s own equipment in advance might save time and resources, because one can then set to work the second the required resources arrive, and so on. Reliance on the future performance is therefore often useful, to the relying party but also to the society in general. For example, it’s good for the society that the expensive resources are in effective use, or that the services are combined with other services

28The detailed reliance model in (Goetz and Scott 1980) considers a non-reciprocal gift and is therefore not directly applicable to our problem. They do consider many relevant issues and other decisions, also in a reciprocal context and that is what we base much of the discussion here.

to enhance their value and sometimes the best way to make these improvements is to anticipate a future performance.

Of course the flipside of this coin is that if the other party fails to perform, the relying party might be worse off than if he had not relied on the performance at all (detrimental reliance (Goetz and Scott 1980)). Thus, he might have a coach ticket or a bottle of wine that he has very little use for (and may not be able to refund).

Configuration or other changes might turn out to be useless and configuration or changes have to be redone (or even just revert to the earlier settings). He might not be able to get any work to the suddenly open slot in his schedule and so on.

Now, it’s easy to see that the decommitment policy has a profound effect on the reliance decision. The higher the decommitment fee in case the opponent does not perform, the more the performance can be relied on. However, there is a level of reliance that is better for the society than some other levels (the optimal level of reliance) and it is not necessarily always the highest possible reliance. It can be counter-productive for the society, for an invidividual to to make extensive and expensive preparations for a performance that is unlikely to happen, because such non-performance only means costs to somebody from the society’s point of view.

The party that must shoulder the cost in the end depends on the decommitment policy.

In the performance decision, the trick was to internalise the opponent’s losses to the decision-maker’s (decommitter’s) decision by making him liable for the opponent’s losses. This made him decommit only when it benefits the society. The approach here is the same, but the prescription is decidedly different. The only way to make the party making the reliance decision to choose the socially optimal level of reliance is to make his compensation in case of non-performance independent of the reliance level chosen. This is because compensating for additional reliance would encourage the party to rely over-optimally on the other party’s performance.

To see why this is so consider the following situation (fromGoetz and Scott(1980)).

A party to a contract knows that the opponent’s performance is less than certain (probability of performance wsless than 1) and let Uperf ormance(ρ) denote the util-ity in case the other party performs according to the contract (beneficial reliance) and Udecommitment(ρ) denote the utility if the other party decommits instead (detri-mental reliance) without any fees. The ρ is the level of reliance. The Uperf ormance

is increasing and Udecommitment is decreasing in ρ to the maximum level of ρmax.²⁹ This means that by increasing reliance, a party can increase Uperf ormance but pays for that with a decrease of Udecommitment. Now, the expected utility in the situation is

EU = wsUperf ormance(ρ) + (1 − ws)(Udecommitment(ρ) + f ).

An interesting point to make here is that the optimal reliance level (ρ^∗) is inde-pendent of the fee f as long as f does not depend on ρ. This follows because the first derivative of EU in relation to ρ does not contain f at all. In contrast, it is equally clear that compensating for the (extra) reliance would be a very bad policy. For example, the full Expectation Damages policy where all reliance would be compensated for would always lead to the maximum possible reliance (ρ = ρmax).³⁰ So, to make an extreme example in a contract of certain type of bolt, it would make sense for the buyer to keep a hugely expensive machine, like a paper mill, running although it might be completely destroyed if an order of one bolt does not arrive in time, because the buyer of the bolt is indifferent between the bolt arriving and the machine continuing to make paper and the bolt failing to appear and the machine getting destroyed, because the bolt seller would cover the difference. Of course such a result would be non-sensical and no court would ever order such compensation to be made. The law has its own mechanisms for limiting compensation.

However, a problem remains. Usually in the literature the optimal policy in case of non-performance is said to be ‘zero’ compensation (Smith 2004; Kornhauser 1986) and the model above seems to indicate that any reliance-independent fee (also non-zero) will do equally well. There is no conflict here: zero simply refers to the reliance that should be covered. This can perhaps be better illustrated by considering the seller. His costs come from reliance: by undertaking costly and time-consuming preparation he relies on the performance that the buyer has promised, because only through that will he be able to cover his costs and get a profit. If he does not start preparations, he will not incur any costs but then he will not be able to reap any benefits later either (Uperf ormance− Udecommitment).

Now, the analysis on the reliance decision prescribes that none of this reliance

29For values ρ > ρmax, we could say that both Uperf ormanceand Udecommitmentare decreasing.

The level ρmaxtherefore denotes the highest possible reliance that makes sense, i.e. the increase in value is greater than the cost. After this value, the costs are greater than the increase in value and even if performance was certain, it was not rational to rely that much.

30This is because the fee f would be equal to Uperf ormance− Udecommitment and therefore the party would get Uperf ormance with probability of 1. From the above discussion it follows that Uperf ormance is maximised when ρ = ρmax.

should be covered by the decommitment fee, because if it is covered, the seller has no incentives to consider trust-worthiness of his opponent and if his costs and profits are always covered, he can start working even if he knows the buyer is very likely to decommit at some point.³¹ Only a performance will benefit the society.

Decommitments will only bring costs and possibly re-distribution of wealth. This of course contrasts with what we learnt in the performance decision, where the parties covering for each other’s costs and profits were essential. We will (in chapter 5) build on this model and investigate how different decommitment policies (rules on decommitment fees) will affect the common good.