An Experimental Comparison of Reliance Levels Under Alternative Breach Remedies

Posted: 30 Jul 2003

See all articles by Randolph Sloof

Randolph Sloof

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

Edwin Leuven

University of Amsterdam - Faculty of Economics and Business (FEB); IZA Institute of Labor Economics

Hessel Oosterbeek

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

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

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Abstract

Breach remedies serve an important role in protecting relationship-specific investments. Theory predicts that some common remedies protect too well and induce over investment, either though complete insurance against potential separation or the possibility that breach is prevented by increasing the damage payment due through the investment made. In this article we report on an experiment designed to address whether these two motives show up in practice. In line with theoretical predictions, we find that over investment does not occur under liquidated damages. In the case of expectation damages, the full-insurance motive indeed appears to be operative. In the case of reliance damages, both motives are at work, as predicted.

Suggested Citation

Sloof, Randolph and Leuven, Edwin and Oosterbeek, Hessel and Sonnemans, Joep, An Experimental Comparison of Reliance Levels Under Alternative Breach Remedies. Available at SSRN: https://ssrn.com/abstract=406684

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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Edwin Leuven

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

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

IZA Institute of Labor Economics

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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

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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