The Moral-Hazard Effect of Liquidated Damages: An Experiment on Contract Remedies

Journal Of Institutional and Theoretical Economics (JITE) (Forthcoming)

UC Hastings Research Paper No. 224

22 Pages Posted: 30 Nov 2016

See all articles by Ben Depoorter

Ben Depoorter

UC Law, San Francisco; Stanford Law School Center for Internet & Society; Ugent - CASLE

Sven Hoeppner

Ghent University

Lars Freund

Max Planck Institute for Research on Collective Goods

Date Written: November 28, 2016

Abstract

Recent evidence suggests that liquidated-damages clauses provide efficiency advantages by crowding out contracting parties' deontological concerns about efficient breach. In this paper we highlight an important downside to damage stipulations by parties. Based on findings obtained in a controlled laboratory experiment, we suggest that express damage stipulations trigger negative reciprocity and moral hazard, reducing performance by contract promisors. Such negative effects are absent when damages are exogenously imposed. Moreover, our results indicate that when stipulating damages, contract parties attain less cooperative surplus than when they are subject to an exogenously imposed remedy. Principals, not agents, bear this loss.

Suggested Citation

Depoorter, Ben and Hoeppner, Sven and Freund, Lars, The Moral-Hazard Effect of Liquidated Damages: An Experiment on Contract Remedies (November 28, 2016). Journal Of Institutional and Theoretical Economics (JITE) (Forthcoming), UC Hastings Research Paper No. 224, Available at SSRN: https://ssrn.com/abstract=2876856

Ben Depoorter (Contact Author)

UC Law, San Francisco ( email )

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Stanford Law School Center for Internet & Society ( email )

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Sven Hoeppner

Ghent University ( email )

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Ghent, 9000
Belgium

Lars Freund

Max Planck Institute for Research on Collective Goods ( email )

Kurt Schumacher Str 10
Bonn, 53113
Germany

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