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Do Contract Remedies Affect Efficient Renegotiation? An Experiment

Author

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  • Bigoni, Maria

    (University of Bologna)

  • Bortolotti, Stefania

    (University of Bologna)

  • Parisi, Francesco
  • Zhang, Xin

    (University of Bologna)

Abstract

Rational parties enter into a contract if the agreement is mutually beneficial. However, after the contract is formed, changes to the costs and/or benefits of performance may render the original contract undesirable. In this paper, we carry out an incentivized experiment to study the effect of alternative remedies on the parties' ability to renegotiate their contractual obligations. After entering into a contract, experimental subjects observe symmetrical changes to the original costs and/or benefits, which create a misalignment of their performance vs. breach incentives. Renegotiation of the original contract would allow parties to realign their interests and to capture some additional surplus. Our experimental design compares the effects of damage and specific performance remedies on the parties' ability to renegotiate. Our results confirm Coase' (1960) irrelevance of remedies proposition, providing novel insights for the choice of contract remedies in the face of possible market shocks.

Suggested Citation

  • Bigoni, Maria & Bortolotti, Stefania & Parisi, Francesco & Zhang, Xin, 2024. "Do Contract Remedies Affect Efficient Renegotiation? An Experiment," IZA Discussion Papers 17220, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17220
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    References listed on IDEAS

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    More about this item

    Keywords

    efficient breach; contract remedies; specific performance; damages;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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