Subcontracting and Economic - Indian Institute of Public Administration

Damages in Case of Subcontracting
opportunity income of the subcontractors. However, in
case of imperfect damage (under incomplete contract),
expectation damage may be less than reliance damage as
the court may not go by incentive compatibility nonbinding
prices and may look only into reservation
constraint prices.
The problem can be made more complicated if one brings
in the case of risk. There, attitudes towards the risk will be
crucial and the model has to be recast in terms of expectations.
This poses additional problems. The important point
which must be stressed is that it is not uncertainty which is
the key to the calculation of damage measure, it is the asymmetry
of information about quality, which creates the problem.
It is only the subcontractor who has the sole knowledge
about quality of inputs supplied. Neither the parent
firm nor the court knows the true quality, since the good
has to be consumed to understand its true quality. The
purpose of the contract is to do what the incentive mechanism
is supposed to do. It acts as a proxy for the actions
of the principal firm, which satisfies the incentive compatibility
of the subcontractors and ensures high quality on its
part. The existing contract law should thus be suitably
modified to specify damages in case of incomplete contracts
in cases of subcontracting.
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