Unbundling Efficient Breach: An Experiment

Quaderni - Working Paper DSE N° 1088

42 Pages Posted: 8 Dec 2016

See all articles by Maria Bigoni

Maria Bigoni

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Stefania Bortolotti

MPI for Research on Collective Goods

Francesco Parisi

University of Minnesota - Law School; University of Bologna

Ariel Porat

Tel Aviv University; University of Chicago - Law School

Multiple version iconThere are 3 versions of this paper

Date Written: November 28, 2016

Abstract

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

Bigoni, Maria and Bortolotti, Stefania and Parisi, Francesco and Porat, Ariel, Unbundling Efficient Breach: An Experiment (November 28, 2016). Quaderni - Working Paper DSE N° 1088. Available at SSRN: https://ssrn.com/abstract=2881462 or http://dx.doi.org/10.2139/ssrn.2881462

Maria Bigoni (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, Bologna 40126
Italy
+390512098134 (Phone)

HOME PAGE: http://https://www.unibo.it/sitoweb/maria.bigoni/en

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Stefania Bortolotti

MPI for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Francesco Parisi

University of Minnesota - Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

University of Bologna ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

Ariel Porat

Tel Aviv University ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel
972-3-6408283 (Phone)
972-3-6407260 (Fax)

HOME PAGE: http://english.tau.ac.il/profile/porata

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

HOME PAGE: http://www.law.uchicago.edu/faculty/porat

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