Regulating Damage Clauses in (Labor) Contracts
This paper analyzes 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. It is shown 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-a-vis third parties and (b) among the contracting parties themselves. Moreover, 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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Volume (Year): 163 (2007)
Issue (Month): 4 (December)
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