Game Theory and Mathematical Economics Research Seminar
Lecturer:
Dr. Roy Baharad (Hebrew University)
Title:
Contract Remedies and Search Efforts
Abstract:
Contract theorists routinely assume that opportunities for efficient breach are exogenous. This prompts the conventional approach to contract remedies, according to which expectation damages are preferred to the disgorgement rule: when ex-post renegotiations are unfeasible, the former regime facilitates efficient breach while the latter deters it. In this paper, I offer a simple model in which two parties to a contract can exert search efforts to locate better contractual alternatives. The endogeneity of efficient-breach opportunities gives rise to a novel outlook on the choice of remedies for a breach of contract. Specifically, this paper opts out of the expectation damages versus disgorgement distinction to offer two new remedies: conditional disgorgement, which ignores each party’s breaching or non-breaching status and grants the breach surplus to the party who has located a better contractual alternative; and partial disgorgement, which divides the breach surplus by bestowing a fixed, predetermined share upon each party. I show that these remedies are generally superior to extant regimes in terms of inducing optimal search efforts. The underlying intuition is that under the proposed rules, each party is better off with being either the breaching or the non-breaching party, and therefore, is incentivized to carry out both selfish and cooperative search. This paper likewise makes the inner comparison between conditional and partial disgorgement, deriving conditions for the optimality of each rule. Finally, it discusses the results in light of existing contract doctrine and commercial practice.
Location:
Eilan Hall, Feldman Building, Second Floor, Edmond Safra Campus.