Contracts commit individuals to a future course of action and create feelings of entitlement on the parties. In a contractual gap, parties’ duties and rights are not univocal, and while promisors will often feel entitled to breach, promisees will feel entitled to receive the promised performance. This divergence leads to disputes, aggrievement, and retaliatory behavior whenever one of the parties feels shortchanged. Remedies for breach are then apt not only to induce performance by promisors, but also to minimize promisees’ aggrievement, reduce retaliation, and thereby keep the peace in society.
This article reports results from a laboratory experiment that investigates under what circumstances promisees retaliate to breach and to what extent expectation damages fulfill the function of crowding out retaliatory behavior. In the experiment, participants took the role of a seller or a buyer and interacted repeatedly, with promisors making incentivized decisions to breach or keep the contract in different contingencies, and promisees to enforce the contract in case of breach while also being able to retaliate against the party in breach. Results reveal how norms of fairness play a fundamental role in shaping parties’ reactions to breach, as promisees did not punish any violation of a prior agreement. They rather punished breach when the promisor profited from it and the outcome was an unfair distribution of the gains from trade. Neither loss of expectancy nor the inefficiency of the result induced retaliation. Compensation successfully crowded out retaliation by disappointed promisees, and thereby avoided high welfare losses from decentralized forms of punishment of perceived wrongs.
