Do Liquidated Damages Clauses Affect Strategic Mortgage Default Morality?: A Test of the Disjunctive Thesis
30 Pages Posted: 12 Jul 2014
Date Written: July 7, 2014
We test the disjunctive thesis as it relates to mortgage contracts and find that a liquidated damages clause shifts ones view of a mortgage from a promise to perform to either a promise to perform or pay compensatory damages. However, when a strategic mortgage default is responsible for the breach, the perceived immorality of this action overwhelms the liquidated damages clause effect in support of the disjunctive thesis. When comparing mortgages to other types of installment loans, people’s “stated preference” is that breaching a mortgage is more immoral, but their “revealed preference” measure indicates that breaching a mortgage is morally on par with breaching an auto loan, credit card debt, and even a phone contract.
Keywords: strategic mortgage default, disjunctive thesis, liquidated damages, morality, legal contracts
JEL Classification: D10; D81; K11; R20
Suggested Citation: Suggested Citation