%0 Report
        %A Muehlheusser, Gerd
        %T Regulating Damage Clauses in (Labor) Contracts
        %D 2006
        %8 2006 Oct
        %I Institute of Labor Economics (IZA)
        %C Bonn
        %7 IZA Discussion Paper
        %N 2367
        %U https://www.iza.org/publications/dp2367
        %X We analyze the role of damage clauses in labor contracts using a model in which a worker may want to terminate his current employment relationship and work for another firm. We show that the initial parties to a contract have an incentive to stipulate excessive damage clauses, which leads to ex post inefficiencies. This result is due to rent seeking motives a) between the contracting parties vis-à-vis third parties and b) among the contracting parties themselves. We then show that, by imposing an upper bound on the amount of enforceable damages, a regulator can induce a Pareto improvement; in some cases even the first best can be achieved.
        %K asymmetric information
%K breach of contract
%K penalty doctrine
%K damage clauses
%K labor contracts