Regulating Damage Clauses in (Labor) Contracts
AbstractWe analyze the role of damage clauses in labor contracts using a model in which a worker may want to terminate his current employment relationship and work for another firm. We show that the initial parties to a contract have an incentive to stipulate excessive damage clauses, which leads to ex post inefficiencies. This result is due to rent seeking motives a) between the contracting parties vis-à-vis third parties and b) among the contracting parties themselves. We then show that, by imposing an upper bound on the amount of enforceable damages, a regulator can induce a Pareto improvement; in some cases even the first best can be achieved.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2367.
Length: 31 pages
Date of creation: Oct 2006
Date of revision:
Publication status: published in: Journal of Institutional and Theoretical Economics, 2007, 163 (4), 531-551
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Find related papers by JEL classification:
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-LAW-2006-10-28 (Law & Economics)
- NEP-REG-2006-10-28 (Regulation)
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