Unbundling Efficient Breach: An Experiment
Forthcoming, Journal of Empirical Legal Studies (2017)
39 Pages Posted: 2 Dec 2016 Last revised: 6 Dec 2016
Date Written: December 1, 2016
Current law and economics scholarship analyzes efficient breach cases monolithically. The standard analysis holds that breach is efficient when performance of a contract generates a negative total surplus for the parties. However, by simplistically grouping efficient breach cases as of a single kind, the prior literature overlooks that gain-seeking breaches might be different from loss-avoiding breaches. To capture these different motives, we designed a novel game called Contract-Breach Game where we exogenously varied the reasons for the breach — pursuing a gain or avoiding a loss — under a specific performance remedy. Results from an incentivized laboratory experiment indicate that the motives behind the breach induce sizable differences in behavior; subjects are less willing to renegotiate when facing gain-seeking than loss-avoiding breaches, and the compensation premium obtained by the promisee is higher. Our analysis suggests that inequality aversion is an important driver of our results; indeed, inequality-averse subjects accept low offers more often in cases of loss-avoiding breaches than gain-seeking breaches. These results give us insight into the preferences and expectations of ordinary people in a case of a breach.
Keywords: contract damages, efficient breach, motives for breach, Contract-Breach game
JEL Classification: K12, D86, C9
Suggested Citation: Suggested Citation