Seminar: "The inefficiency of efficient breach" - Prof. Andreas Engert (Free Universitat Berlin)

 Research Seminars in Law, Economics and Empirics

"The inefficiency of efficient breach"

Prof. Andreas Engert (Free University Berlin)

18. April 2023, 6 pm, room 38

Abstract: The “efficient breach hypothesis” contends that a seller (promisor) should be allowed to back out of a contract against full compensation of the buyer (promisee). We study how expectation damages as the sole remedy for breach affect renegotiation of the contract when it really matters—if the seller cannot be sure whether performing her obligation is efficient. In a bargaining experiment with two-sided asymmetric information about the buyer’s valuation and the seller’s performance cost, we find that giving the buyer a right to specific performance promotes efficient bargaining: The parties more often agree on non-performance, or continue to execute the contract, when it is optimal to do so. The seller’s ability to breach the contract can correct bargaining failure but the benefits are small and outweighed by losses from inefficient breach and costly conflict.