An Experimental Comparison of Reliance Levels under Alternative Breach Remedies
University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
University of Amsterdam - Faculty of Economics and Business (FEB); Institute for the Study of Labor (IZA)
University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)
University of Amsterdam - Amsterdam School of Economics (ASE)
Breach remedies serve an important role in protecting relationship-specific investments. The theoretical literature predicts that some commonly used types of breach remedies may protect too well, in the sense that they induce over-investment. The driving forces behind this result are the complete insurance against potential separation that breach remedies may provide, and the potential possibility to prevent breach by increasing the damage payment due through the investment made. The question remains whether these two motives, and thus the derived overinvestment result, indeed show up in practice. In this paper we report on an experiment designed to address this issue.
Three different remedies are studied: (i) liquidated damages, (ii) expectation damages and (iii) reliance damages. In line with theoretical predictions we find that over-investment does not occur under liquidated damages. In case of expectation damages the full insurance motive indeed appears to be operative, but due to fairness considerations it leads to (slightly) less overinvestment than predicted. Reciprocal behavior reduces the working of the breach prevention motive to overinvest predicted for the reliance damages case. Overall, over-investment indeed occurs, but is less severe than theory predicts.
Number of Pages in PDF File: 41
JEL Classification: K12, J41, C91working papers series
Date posted: June 21, 2000
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.438 seconds