Incentives to Breach

Tess Wilkinson-Ryan

American Law and Economics Review, 2015, vol. 17, issue 1, 290-311

Abstract: Empirical evidence and common sense tell us that most people are responsive to economic incentives as well as social and moral norms, and that these sets of incentives are often in tension. The tradeoffs between moral and financial preferences are particularly salient in much legal decision-making, especially in the private law context. This paper presents the methods and results of two new behavioral studies designed to elicit evidence for how people factor both monetary and non-monetary incentives in breach of contract. Participants in Study 1 played a Trust game modified to capture key features of a breach decision. Subjects were offered increasing payouts to break the deal they had made with an anonymous partner. 18.6% participants indicated willingness to break a deal for any amount of profit, and over a quarter (27.9%) were unwilling to breach even when offered $24, almost triple the initial payout, with the remaining subjects identifying a break-point somewhere in between. Study 2 used hypothetical scenarios asking subjects to take the perspectives of buyers or sellers and to indicate how much profit or savings an alternate deal would have to offer in order for the subject to breach the original contract, and found a similar curve. The paper concludes with a discussion of how these methods and preliminary findings may be deployed for more fine-grained inquiries into when individuals do and do not choose a financially attractive breach about which they have moral reservations.

Date: 2015
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