Some Findings on Contractual Penalties

Abstract

There is quite a debate between legal scholars from the Civil and Common Law systems on whether conventional penalties should be enforced. In this contribution I use an easy economic model to predict some effect of such clauses and present the results from an experimental survey. It shows that the predictions made by the model resemble the empirical outcomes quite well. The main results are that conventional penalties make goods more expensive but can be used to restore the willingness to pay of consumers which would drop significantly in the face of potential harm. Therefore such penalty clauses reflect an inter party risk allocation and serve both parties leading to the conclusion that enforcement is necessary.

Keywords: Contractual penalty, Civil Law

JEL Classification: K12