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Paper Abstract
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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 compares the effects of damage and specific performance remedies on the
parties’ ability to renegotiate. Our results confirm Coase’ (1960) irrelevance of remedies
proposition, providing novel insights for the choice of contract remedies in the face of
possible market shocks.
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Paper Citation
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Bigoni, M., Bortolotti, S., Parisi, F., Zhang, X. (2024). Do Contract Remedies Affect Efficient Renegotiation? An Experiment. IZA Discussion Paper 17220.
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Paper URL
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https://docs.iza.org/dp17220.pdf
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