Breach Remedies, Reliance, and Renegotiation

37 Pages Posted: 27 Dec 2001

See all articles by Randolph Sloof

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Netspar

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Date Written: December 21, 2001

Abstract

Breach penalties can be used to protect specific investments and are therefore a remedy against holdup. Not all breach remedies are, however, equally efficient. Some common types are predicted to protect too well thereby inducing overinvestment. Theoretically overinvestment is driven by two motives: the insurance motive and the separation prevention motive. This paper presents results from an experiment designed to test the effect of different breach remedies on specific investments in a setting where ex post renegotiations are possible. In line with other experimental studies we find that actual investment levels tend to exceed the predicted levels somewhat. Nevertheless the results provide ample support for the theory: investment levels under the different remedies vary in accordance with the theoretical predictions. More specifically, where predicted the insurance motive and the separation prevention motive are indeed at work.

Keywords: breach remedies, specific investments, experiments

JEL Classification: K12, J41, C91

Suggested Citation

Sloof, Randolph and Oosterbeek, Hessel and Riedl, Arno M. and Sonnemans, Joep, Breach Remedies, Reliance, and Renegotiation (December 21, 2001). Available at SSRN: https://ssrn.com/abstract=294803 or http://dx.doi.org/10.2139/ssrn.294803

Randolph Sloof (Contact Author)

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
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+31 20 525 4310 (Fax)

Tinbergen Institute ( email )

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Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4242 (Phone)
+31 20 525 5283 (Fax)

HOME PAGE: http://www.fee.uva.nl/scholar/oosterbeek/

Tinbergen Institute Amsterdam (TIA)

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Institute for the Study of Labor (IZA)

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

Arno M. Riedl

Maastricht University ( email )

Department of Economics (AE1)
P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

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

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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