It Takes Three to Tango: An Experimental Study of Contracts with Stipulated Damages
Claudia M. Landeo
University of Alberta - Department of Economics
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
July 5, 2012
Can incumbent sellers and buyers use contracts with stipulated damages to extract surplus from entrants? We experimentally study the strategic environments of Aghion and Bolton (1987) and Spier and Whinston (1995). As predicted, contract renegotiation weakens the commitment power of stipulated damage clauses. Behavioral deviations, including more generous offers from sellers and entrants, suggest non-monetary preferences. A dictator-seller environment indicates the limited role of inequity aversion. With communication, equitable allocations are more frequent and exclusion less frequent. Our results underscore the importance of payoff aspirations influenced by social norms of fairness. A theoretical extension accommodates our experimental findings.
Number of Pages in PDF File: 59
Keywords: Stipulated Damages, Contract Renegotiation, Three-Player Bargaining Games, Non-Monetary Preferences, Payoff Aspirations, Experiments, Antitrust, Buyer-Seller Exchange Environment, Dictator Environment, Ultimatum Games, Unstructured Communication, Fairness, Regards for Others, Exclusive Dealing
JEL Classification: C72, C91, D62, D86, K12, K21, K41, L12, L42working papers series
Date posted: July 19, 2012
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