Precontractual reliance

During contractual negotiations, parties often make reliance expenditures t hat would increase the surplus should a contract be made. This paper analyz es decisions to invest in precontractual reliance under alternative legal r egimes. Investments in reliance will be socially suboptimal in the absence of any precontractual liability-and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how "intermediate"-liability rules could be b est designed to induce efficient reliance decisions. One of our results ind icates that the case for liability is shown to be stronger when a party ret racts from terms that it has proposed or from preliminary understandings re ached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that precontractua l liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations.