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Regulating Damage Clauses in (Labor) Contracts

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  • Muehlheusser, Gerd

    (University of Hamburg)

Abstract

We 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.

Suggested Citation

  • Muehlheusser, Gerd, 2006. "Regulating Damage Clauses in (Labor) Contracts," IZA Discussion Papers 2367, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2367
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; breach of contract; penalty doctrine; damage clauses; labor contracts;
    All these keywords.

    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; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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