Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/305662 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 17220
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
efficient breach
contract remedies
specific performance
damages
JEL: 
K12
K41
C90
D86
D91
Document Type: 
Working Paper

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