Unbundling Efficient Breach: An Experiment

Current law and economics scholarship analyzes efficient breach cases monolithically. The standard analysis holds that breach is efficient when performance of a contract generates a negative total surplus for the parties. However, by simplistically grouping efficient breach cases as of a single kind, the prior literature overlooks that gain‐seeking breaches might be different from loss‐avoiding breaches. To capture these different motives, we designed a novel game called the Contract‐Breach Game where we exogenously varied the reasons for the breach—pursuing a gain or avoiding a loss—under a specific performance remedy. Results from an incentivized laboratory experiment indicate that the motives behind the breach induce sizable differences in behavior; subjects are less willing to renegotiate when facing gain‐seeking than loss‐avoiding breaches, and the compensation premium obtained by the promisee is higher. Our analysis suggests that inequality aversion is an important driver of our results; indeed, inequality‐averse subjects accept low offers more often in cases of loss‐avoiding breaches than gain‐seeking breaches. These results give us insight into the preferences and expectations of ordinary people in a case of a breach.