Unbundling Efficient Breach: An Experiment

Maria Bigoni, Stefania Bortolotti, Francesco Parisi, Ariel Porat

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

Current law and economics scholarship analyzes efficient breach cases monolithically. The standard analysis holds that breach is efficient when performance of a contract generates a negative total surplus for the parties. However, by simplistically grouping efficient breach cases as of a single kind, the prior literature overlooks that gain-seeking breaches might be different from loss-avoiding breaches. To capture these different motives, we designed a novel game called the Contract-Breach Game where we exogenously varied the reasons for the breach—pursuing a gain or avoiding a loss—under a specific performance remedy. Results from an incentivized laboratory experiment indicate that the motives behind the breach induce sizable differences in behavior; subjects are less willing to renegotiate when facing gain-seeking than loss-avoiding breaches, and the compensation premium obtained by the promisee is higher. Our analysis suggests that inequality aversion is an important driver of our results; indeed, inequality-averse subjects accept low offers more often in cases of loss-avoiding breaches than gain-seeking breaches. These results give us insight into the preferences and expectations of ordinary people in a case of a breach.

Original languageEnglish (US)
Pages (from-to)527-547
Number of pages21
JournalJournal of Empirical Legal Studies
Volume14
Issue number3
DOIs
StatePublished - Sep 2017
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2017 Cornell Law School and Wiley Periodicals, Inc.

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