Decreasing-Liability Contracts

Robert Cooter*, Ariel Porat

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing-liability contract. To implement such a contract, we recommend deducting past expenditures on incomplete performance from liability. We show that some types of progress-payment contracts are materially equivalent to decreasing-liability contracts. Our analysis should prove useful for elucidating progress-payment contracts and for drafting and litigating phased contracts.

Original languageEnglish
Pages (from-to)157-197
Number of pages41
JournalJournal of Legal Studies
Issue number1
StatePublished - Jan 2004


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