An Experimental Comparison of Reliance Levels under Alternative Breach Remedies
AbstractBreach remedies serve an important role in protecting relationship-specific investments. Theory predicts that some common remedies protect too well and induce overinvestment, 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 overinvestment 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. Copyright 2003 by the RAND Corporation.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 34 (2003)
Issue (Month): 2 (Summer)
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- Randolph Sloof & Hessel Oosterbeek & Joep Sonnemans, 2006. "On the Importance of Default Breach Remedies," Tinbergen Institute Discussion Papers, Tinbergen Institute 06-082/1, Tinbergen Institute.
- Sloof, Randolph & Oosterbeek, Hessel & Riedl, Arno & Sonnemans, Joep, 2006. "Breach remedies, reliance and renegotiation," International Review of Law and Economics, Elsevier, Elsevier, vol. 26(3), pages 263-296, September.
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