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{\bf Tortious Interference with Contracts: Why Punish It? } \\
May 5, 2004 \\
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Eric Rasmusen \\
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{\it Abstract}
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Transaction costs do not justify the doctrine of tortious interference with contract. Better reasons are malice, judgement-proofness, and foreseeable court error.
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\noindent \hspace*{20pt} Indiana University Foundation Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University, BU456, 1309 E. 10th Street, Bloomington, Indiana, 47405-1701. Office: (812) 855-9219. Fax: 812-855-3344 Erasmuse@indiana.edu. \\
Mypage.iu.edu/$\sim$erasmuse, Mypage.iu.edu/$\sim$erasmuse/papers/tortious-rasmusen.pdf.
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I thank Tillman Klumpp for comments and Yacheng Sun for research assistance.
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\noindent {\bf 1. Introduction}
Consider the following three hypotheticals:
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{\it Tort. } Injuror deliberately heckles a performance in Victim's theatre out of pure malice, causing damage of \$10 to Victim. What damages should the court require Injuror to pay to Victim?
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{\it Contract. } Promisor breaches a contract in which he promised to perform in Victim's theatre, causing damage of \$10 to Victim. What damages should the court require Promisor to pay to Victim?
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{\it Tortious Interference with Contract. } Promisor breaches a contract in which he promised to perform in Victim's theatre, causing damage of \$10 to Victim. Promisor does this because Inducer, who was aware of the contract, made him a better offer to perform that night. What damages should the court require Promisor and Inducer to pay to Victim?
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Section 766 of the {\it Second Restatement of Torts } defines the tort of interference with contract as follows:
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One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.
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Previous articles (McChesney, Long, Gergen, Myers) are vague as to what the remedies are, which is the crux of the matter. Clearly, punitive damages are available in tort, unlike in contract. Questions I still need to answer are:
1. Can Victim collect compensatory damages from both Promisor and Inducer, for double compensation overall?
2. Can Victim ask for restitution damages--- the gain to Inducer from his wrongful conduct?
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What about efficiency? Four explanations have been attempted.
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1. Court error (Bevier)
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2. Transaction costs (McChesney)
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3. Malice
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4. Judgement-Proofness (Landes-Posner, bondage cases of the 1900 South)
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{\it The Information Story }
(1) Nature chooses the Victim's investigation cost, $x \geq 0$, using the density $f(x)$ (denote the cumulative probability by $F(x)$).
(2) The Victim pays $x$ if he wishes and learns which one of a large population of possible performers with average value $v=a$ actually has the higher value $v=a+b$.
(3) The Victim chooses a performer with whom to negotiate.
(4) The Victim and the chosen Performer bargain to choose a performance price $p_1$, which will be either $p_1=a$ (if $v$ is unknown) or some $p_1$ in the interval $(a, v)$.
(5) If the Inducer chooses to induce breach, the Inducer and the Performer bargain to choose a performance price $p_2$ in the interval $(p_1, v)$.
(6) If the Inducer induced breach, the court forces the Inducer to pay damages of $d$ to Victim.
(7) If the Inducer did not induce breach, the Performer may breach anyway. The court then forces him to pay expectation damages to Victim, which are zero in this case because $p_1>a$.
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{\it Payoffs:}
The Victim's payoff is $v-p_1$ if no breach occurs, minus $x$ if he discovered $v$ in advance. If the contract is breached, his payoff is $d$, or $d-x$ if he discovered $v$ in advance.
The Performer's payoff is the price he gets (either $p_1$ or $p_2$).
The Inducer's payoff is 0 if no breach occurs. Otherwise, it is $v - p_2 -d$.
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The first-best solution would maximize the sum of the payoffs of Victim and Performer.\footnote{xxx Maybe change these to Payer, Performer, and Inducer.} Without investigation, the Victim would choose the Performer randomly, so in expectation $v=a$ and the sum of the payoffs is $a$. With investigation, the Victim would choose the high-value Performer, so $v= a+b$ and the sum of the payoff is $a+b-x$. Clearly, investigation should occur if $b>x$ and not otherwise. Thus, the overall expected social payoff is
$$
a+ \int_0^b (b-x) f(x) dx
$$
If damages are high, there will be no breach. The Victim will forecast the value of $p_1$, which is the result of bargaining between him and the Performer. He will choose to pay $x$ if $a+b - p_1 >x$, so
$$
a+ \int_0^{b+ (a -p_1) } (b-x) f(x) dx,
$$
which is smaller than in the first-best, since $aa$, because the Inducer will then deduce that $v = a+b$. The Victim's payoff from investigation would be $d$, so he will investigate if $d>x$. This yields a social payoff of
$$
a+ \int_0^d (b-x) f(x) dx .
$$
If $da$.
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{\it Payoffs:} The Performer's payoff is the price he gets (either $p_1$ or $p_2$).
The Victim's payoff is $v-p_1-x$ if no breach occurs. If the contract is breached, his payoff is $d-x$.
The Inducer's payoff is 0 if no breach occurs. Otherwise, it is $v - p_2 -d$.
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