An Experimental Comparison of Reliance Levels Under Alternative Breach Remedies

41 Pages Posted: 21 Jun 2000

See all articles by Randolph Sloof

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Edwin Leuven

University of Amsterdam - Faculty of Economics and Business (FEB); IZA Institute of Labor Economics

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2000

Abstract

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.

JEL Classification: K12, J41, C91

Suggested Citation

Sloof, Randolph and Leuven, Edwin and Oosterbeek, Hessel and Sonnemans, Joep, An Experimental Comparison of Reliance Levels Under Alternative Breach Remedies (April 2000). Available at SSRN: https://ssrn.com/abstract=224528 or http://dx.doi.org/10.2139/ssrn.224528

Randolph Sloof (Contact Author)

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 5241 (Phone)
+31 20 525 4310 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Edwin Leuven

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 5241 (Phone)
+31 20 525 4310 (Fax)

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4242 (Phone)
+31 20 525 5283 (Fax)

HOME PAGE: http://www.fee.uva.nl/scholar/oosterbeek/

Tinbergen Institute Amsterdam (TIA)

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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