TY  - RPRT
        AU  - Muehlheusser, Gerd
        TI  - Regulating Damage Clauses in (Labor) Contracts
        PY  - 2006/Oct/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 2367
        UR  - https://www.iza.org/publications/dp2367
        AB  - 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.
        KW  - asymmetric information
KW  - breach of contract
KW  - penalty doctrine
KW  - damage clauses
KW  - labor contracts
        ER  -