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On the Importance of Default Breach Remedies

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  • Randolph Sloof
  • Hessel Oosterbeek
  • Joep Sonnemans

Abstract

Theory predicts that default breach remedies are immaterial whenever contracting costs are negligible. Some experimental studies, however, suggest that in practice default rules do matter, as they may affect parties' preferences over contract terms. This paper presents results from an experiment designed to address the importance of default breach remedies for actual contract outcomes. We find that default rules do have an influence. The reason for this is not that contract proposals and/or responses are biased towards the default, but rather that parties often disagree over what the best contract is and therefore end up with the default.

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  • Randolph Sloof & Hessel Oosterbeek & Joep Sonnemans, 2007. "On the Importance of Default Breach Remedies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(1), pages 5-22, March.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200703)163:1_5:otiodb_2.0.tx_2-f
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    1. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
    2. Steven Shavell, 1984. "The Design of Contracts and Remedies for Breach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 121-148.
    3. Ernst Fehr & Susanne Kremhelmer & Klaus M. Schmidt, 2008. "Fairness and the Optimal Allocation of Ownership Rights," Economic Journal, Royal Economic Society, vol. 118(531), pages 1262-1284, August.
    4. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    5. Schwab, Stewart, 1988. "A Coasean Experiment on Contract Presumptions," The Journal of Legal Studies, University of Chicago Press, vol. 17(2), pages 237-268, June.
    6. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    7. Sloof, Randolph & Leuven, Edwin & Oosterbeek, Hessel & Sonnemans, Joep, 2003. "An Experimental Comparison of Reliance Levels under Alternative Breach Remedies," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 205-222, Summer.
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    Cited by:

    1. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.
    2. Randolph Sloof & C. Mirjam van Praag, 2008. "The Effect of Noise in a Performance Measure on Work Motivation," Tinbergen Institute Discussion Papers 08-074/1, Tinbergen Institute.
    3. Urs Schweizer, 2007. "On the Importance of Default Breach Remedies. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(1), pages 23-25, March.
    4. Christoph Engel & Urs Schweizer, 2007. "Editorial Preface," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(1), pages 1-4, March.
    5. Marcin Isabel & Nicklisch Andreas, 2017. "Testing the Endowment Effect for Default Rules," Review of Law & Economics, De Gruyter, vol. 13(2), pages 1-27, July.
    6. Marcin, Isabel & Nicklisch, Andreas, 2014. "Testing the Endowment Effect for Default Rules," WiSo-HH Working Paper Series 10, University of Hamburg, Faculty of Business, Economics and Social Sciences, WISO Research Laboratory.

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    More about this item

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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