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Do Liquidated Damages Encourage Breach? A Psychological Experiment, Tess Wilkinson-Ryan

Michigan Law Review

This Article offers experimental evidence that parties are more willing to exploit efficient-breach opportunities when the contract in question includes a liquidated-damages clause. Economists claim that the theory of efficient breach allows us to predict when parties will choose to breach a contract if the legal remedy for breach is expectation damages. However, the economic assumption of rational wealth-maximizing actors fails to capture important, shared, nonmonetary values and incentives that shape behavior in predictable ways. When interpersonal obligations are informal or underspecified, people act in accordance with shared community norms, like the moral norm of keeping promises. However, when sanctions …