Do Contract Remedies Affect Efficient Renegotiation? An Experiment

Last registered on June 24, 2024

Pre-Trial

Trial Information

General Information

Title
Do Contract Remedies Affect Efficient Renegotiation? An Experiment
RCT ID
AEARCTR-0013798
Initial registration date
June 11, 2024

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published
June 24, 2024, 1:38 PM EDT

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Locations

Region

Primary Investigator

Affiliation
University of Bologna

Other Primary Investigator(s)

PI Affiliation
University of Bologna
PI Affiliation
University of Bologna
PI Affiliation
University of Minnesota

Additional Trial Information

Status
In development
Start date
2024-06-05
End date
2024-06-30
Secondary IDs
Prior work
This trial does not extend or rely on any prior RCTs.
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 allows us to compare the effects of damage and specific performance remedies on the parties’ ability to renegotiate. Our results provide novel insights for the choice of contract remedies in the face of possible market shocks.
External Link(s)

Registration Citation

Citation
Bigoni, Maria et al. 2024. "Do Contract Remedies Affect Efficient Renegotiation? An Experiment." AEA RCT Registry. June 24. https://doi.org/10.1257/rct.13798-1.0
Experimental Details

Interventions

Intervention(s)
Intervention (Hidden)
Intervention Start Date
2024-06-05
Intervention End Date
2024-06-30

Primary Outcomes

Primary Outcomes (end points)
Share of pairs who do not enter the renegotiation phase;
Share of pairs who are unable to reach an agreement during the renegotiation;
Division of the surplus after the shock.
Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
The experiment comprises two parts. In part 1, we consider a modified version of the “Contract-Breach Game” introduced by Bigoni et al. (2017), where a market shock may occur after the parties agreed to sign a binding contract. After learning about the occurrence of a shock, parties can decide to renegotiate the contractual terms under alternative breach remedies. The key, novel aspect of our design is the comparison between two breach remedies, which allows us to compare a damages remedy (Damage treatment) versus a specific performance remedy (Specific Performance treatment). This modified “Contract-Breach Game” à la Bigoni et al. (2017) allows us to study how frequently an efficient agreement to breach is reached under specific performance, and how frequently an efficient agreement to perform the contract is reached under damages. Furthermore, this game allows us to analyze whether the compensation paid by the promisor to the promisee differ between alternative breach remedies, and between alternative reasons to breach. In part 2, all participants take part in a Dictator Game.
Experimental Design Details
Randomization Method
Done in office by a computer
Randomization Unit
Randomization unit: experimental sessions
Was the treatment clustered?
Yes

Experiment Characteristics

Sample size: planned number of clusters
48 6-person matching groups
Sample size: planned number of observations
288 experimental subjects
Sample size (or number of clusters) by treatment arms
144 experimental subjects (24 6-person matching groups) per treatment arm
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
We will test each of our three main hypotheses by means of a two-prong approach. The first approach is more conservative, and it is based on non-parametric two-tailed Wilcoxon Mann-Whitney tests on the difference of the distribution of the outcomes of interest, between treatments. The unit of observation here is the average outcome per matching group, across all rounds, thus we have 48 observations in total. This allows us to detect an effect of 0.85 of a s.d. with α=0.05 and (1-β)=0.8. Based on the data collected by Bigoni et al. (2017), this corresponds to a difference of 3 p.p. in the share of pairs who enter renegotiation when an exogenous shock takes place (HP1), a difference of 5 p.p. in the rate of success of renegotiation (HP2), and a difference of 0.9 units (out of 20) in the surplus allocated to the Seller in the renegotiation stage, when renegotiation is successful The second approach relies on the panel structure of our dataset and allows us to control for the learning dynamics across periods. Based on the simulations obtained via the Stata pc_simulate package (Burlig et al., 2020), this allows us to detect a variation of 4 p.p. in the share of pairs who enter renegotiation when an exogenous shock takes place (HP1), a difference of 6 p.p. in the rate of success of renegotiation (HP2), and a difference of 0.9 units (out of 20) in the surplus allocated to the Seller in the renegotiation stage, when renegotiation is successful, with α=0.05 and (1-β)=0.8.
Supporting Documents and Materials

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IRB

Institutional Review Boards (IRBs)

IRB Name
Comitato di Bioetica - Università di Bologna
IRB Approval Date
2024-06-05
IRB Approval Number
Protocol N. 0156345
Analysis Plan

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Post-Trial

Post Trial Information

Study Withdrawal

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Intervention

Is the intervention completed?
No
Data Collection Complete
Data Publication

Data Publication

Is public data available?
No

Program Files

Program Files
Reports, Papers & Other Materials

Relevant Paper(s)

Reports & Other Materials