Demand for Breach

Abstract

These studies elicit behavioral evidence for how people weigh monetary and non-monetary incentives in efficient breach. Study 1 is an experimental game designed to capture the salient features of the efficient breach decision. Subjects in a behavioral lab were offered different amounts of money to break the deal they had made with a partner. 18.6% of participants indicated willingness to break a deal for any amount of profit, 27.9% were unwilling to breach for the highest payout, and the remaining subjects identified a break-point in between. Study 2 is an online questionnaire asking subjects to take the perspectives of buyers or sellers considering a profitable breach of contract. The results were consistent with Study 1, yielding a demand curve for breach. I conclude by proposing a research agenda that investigates in a systematic way how individuals make legal decisions in the face of competing norms.

Keywords: contracts, behavioral economics, psychology, promises, rational self-interest v. moral duty, moral/financial tradeoffs, empirical studies, characteristics of the breacher and the breach, characteristics of the non-breaching party, consequences of breach, preference endogeneity, competing norms

JEL Classification: C91, D86, K12, L14