On the Importance of Default Breach Remedies

Randolph Sloof, Hessel Oosterbeek, Joep Sonnemans
2007 Journal of Institutional and Theoretical Economics  
Economic theory predicts that default breach remedies are immaterial whenever contracting and bargaining costs are negligible. Parties will then always incorporate the efficient remedy into their contract. Some experimental studies, however, suggest that in practice default rules do matter, because they may affect parties' preferences over the various breach remedies. This paper presents results from an experiment designed to address the (un)importance of default breach remedies for actual
more » ... act outcomes. In contrast to previous studies the focus is on a setting with both explicit interaction between contracting parties and explicit monetary incentives. We find that default rules do have an impact on actual contract choices. The reason for this is not that proposals and/or responses are biased towards the default contract, but rather that parties often disagree over what the best contract is and therefore end up with the default.(JEL: K 12, C 91)
doi:10.1628/093245607780181856 fatcat:tepfxnrncjgt7oq4tij5q44iv4