The Myth of Optimal Expectation Damages
A much-debated question in contract law scholarship is what the optimal measure of damages for breach should be. The casebook answer, drawing from the theory of efficient breach, is expectation damages. This standard answer, which was a major contribution of the law and economics field, has come under attack by theoreticians within that field itself. To shed an empirical perspective on the question, we look at data on what types of damages provisions parties contract for themselves in international debt contracts. Specifically. we examine issuer call provisions, which are economically equivalent to damages for prepayment, yet not viewed as legally problematic in the manner an actual liquidated provision might be. We find little evidence of a preference for the expectations damages measure.