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  

Ben Depoorter

University of California Hastings College of Law; Ugent - CASLE; Stanford CIS

Sven Hoeppner

Ghent University-Universiteit Gent

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)

University of California Hastings College of Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

Ugent - CASLE ( email )

Universiteitstraat 4
Belgium

Stanford CIS ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

Sven Hoeppner

Ghent University-Universiteit Gent ( email )

Coupure Links 653
Gent, 9000
Belgium

Lars Freund

Max Planck Institute for Research on Collective Goods ( email )

Kurt Schumacher Str 10
Bonn, 53113
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
84
rank
270,107
Abstract Views
385
PlumX