Do Contract Remedies Affect Efficient Renegotiation? An Experiment

Maria Bigoni, Stefania Bortolotti, Francesco Parisi and Xin Zhang

No 19365, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Damages; Breach remedies; Specific performance (search for similar items in EconPapers)
JEL-codes: C90 D86 D91 K12 K41 (search for similar items in EconPapers)
Date: 2024-08
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Working Paper: Do Contract Remedies Affect Efficient Renegotiation? An Experiment (2024)
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