Retaliation, Remedies, and Contracts

Sergio Mittlaender,Vincent Buskens

doi:10.1093/aler/ahz006

Abstract

AbstractContracts commit individuals to a future course of action and create feelings of entitlement on the parties. In a contractual gap, parties’ duties and rights are not univocal, and while promisors will often feel entitled to breach, promisees will feel entitled to receive the promised performance. This divergence leads to disputes, aggrievement, and retaliatory behavior whenever one of the parties feels shortchanged. Remedies for breach are then apt not only to induce performance by promisors, but also to minimize promisees’ aggrievement, reduce retaliation, and thereby keep the peace in society. This article reports results from an experiment that investigates under what circumstances promisees retaliate to breach and to what extent expectation damages fulfill the function of crowding out retaliatory behavior. It reveals how norms of fairness play a fundamental role in shaping parties’ reactions to breach, as promisees did not punish any violation of a prior agreement. They rather punished breach when the promisor profited from it, and the outcome was an unfair distribution of the gains from trade. Neither loss of expectancy nor the inefficiency of the result induced retaliation. Expectation damages successfully crowded out retaliation by disappointed promisees, and thereby avoided high welfare losses from decentralized forms of punishment of perceived wrongs.

Highlights

An award of damages for breach of contract fulfills different economic functions
Damages impose a price on breach, and are apt to deter breaches of contract. Another purpose in the giving of those damages, one that has not been considered in traditional economic models, is to substitute private for public redress
Expectation damages can contribute to social welfare by inducing performance if, and only if, performance is socially efficient, and by crowding out costly forms of decentralized punishment of perceived wrongs that is responsible, in single interactions, for high welfare losses

Summary

Introduction

An award of damages for breach of contract fulfills different economic functions. Damages impose a price on breach, and are apt to deter breaches of contract. Another purpose in the giving of those damages, one that has not been considered in traditional economic models, is to substitute private for public redress. Since compensation is a monetary transfer, and consists only in redistribution of money from the promisor in breach to the promisee, it does not cause the same deadweight loss that decentralized forms of punishment, which impose losses for the person punishing as well as for its the victim, create

Methods

Results

Conclusion