The inefficiency of efficient breach: Contract renegotiation under asymmetric Information

  • Date: Mar 19, 2018
  • Time: 05:00 PM (Local Time Germany)
  • Speaker: Andreas Engert
  • University of Mannheim
  • Location: MPI
  • Room: Ground Floor
Revisiting the longstanding debate about contract remedies and "efficient breach," we study experimentally whether expectation damages or specific performance better promote renegotiation of the contract when it matters-when the seller cannot be sure whether performing his obligation is efficient. We hypothesize that giving the buyer a right to specific performance enables her to disclose more private information about her valuation of the good, facilitating agreement between the parties. We test the hypothesis in a first experiment with one-sided asymmetric information: the seller's cost of performance is commonly known but the buyer's valuation is private information. The experimental design aims at insulating the incentive effect, stripping away the contractual context to neutralize the players' normative preconceptions. The results lend some support to the advantages of specific performance. They also suggest that those advantages will become more prominent under two-sided asymmetric information, which we intend to test in a second experiment.
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