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We study the steady-state equilibrium of models where individuals meet pairwise in a costly stochastic search process and negotiate contracts to product output. Different meetings yield different outputs, and so an individual in a contract may wish to continue search to find a better match. If he is successful, he will break his original contract. In anticipation of possible breaches, contracts may provide for compensation to be paid to the breached-against partner. We examine the effects that several alternative damage rules have on equilibrium search and breach behavior.
Diamond et al. (Mon,) studied this question.