Published in: The RAND Journal of Economics 34 (2). (2003). 205-222. (with Randolph Sloof and Hessel Oosterbeek and Joep Sonnemans)
Breach remedies serve an important role in protecting relationship-specific investments. Theoryrnpredicts that some common remedies protect too well and induce overinvestment, either thoughrncomplete insurance against potential separation or the possibility that breach is prevented byrnincreasing the damage payment due through the investment made. In this article we report onrnan experiment designed to address whether these two motives show up in practice. In line withrntheoretical predictions, we find that overinvestment does not occur under liquidated damages. Inrnthe case of expectation damages, the full-insurance motive indeed appears to be operative. In therncase of reliance damages, both motives are at work, as predicted.