How (Not) to Purchase Novel Goods and Services: Specific Performance versus At-Will Contracts

Abstract

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 contractually specified trade level. In the case of at-will contracting, the seller is free to walk away from the contract after observing the signal. The optimal regime from an economic efficiency point-of-view depends on the informativeness of the signal.