An Experiment on the Role of Penalty Clauses and the Level of Legal Remedies for Breach of Contract on the Prevention of the Hold-Up Problem in Colombian Contract Law

Abstract

This article analyzes the results of an experiment with Colombian students testing the theories that penalty clauses and a high level of legal remedies for breach of contract prevent the hold-up problem. While the results of this experiment failed to statistically confirm the predictions of the theory, they did not reject them. Furthermore, the results show that held-up parties were better off after the parties renegotiated the contract when either a penalty clause was provided or the law increased the level of legal remedies in comparison with a benchmark scenario. On the other hand, the results are a contribution to the field of empirical contract law and economics since the analysis presented here might be replicated in similar experiments and, ultimately, lead to proposals to efficiently address the hold-up problem.