Abstract

http://ssrn.com/abstract=2112665
 
 

References (56)



 


 



Contracts as a Rent-Extraction Mechanism: An Experimental Study of Stipulated Damages under Social Preferences


Claudia M. Landeo


University of Alberta - Department of Economics

Kathryn E. Spier


Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

July 26, 2014


Abstract:     
This paper reports the results of an experiment on stipulated damages as a rent-extraction mechanism. In our theoretical framework, an incumbent seller and a buyer contract in the shadow of a more efficient entrant. In equilibrium, rent extraction through stipulated damages and market foreclosure occur only when contract renegotiation is not permitted. As predicted, we find that contract renegotiation induced the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. When armed with complete information about the entrant's cost, the incumbent fine-tuned the stipulated damages to reflect this more precise information. As a consequence, lower exclusion of high-cost entrants from the market occurred. Other experimental results were not anticipated. First, it is predicted that the sellers will propose the highest stipulated damages when renegotiation is not permitted. We find that, although a small group of sellers exhibited a behavior aligned with theory, the majority of sellers departed from that behavior and made more generous offers. Second, our theory predicts that stipulated damages lose their rent-extraction value when renegotiation is permitted. Our data indicate that the incumbent seller extracted value from the more efficient entrant in renegotiation environments as well. Findings from the dictatorial seller and buyer-entrant communication treatments suggest that social preferences influenced players' behavior.

Number of Pages in PDF File: 47

Keywords: Stipulated Damages; Rent Extraction; Market Foreclosure; Renegotiation; Social Preferences; Experiments

JEL Classification: C72, C91, D86, K12, K21, L42

working papers series


Download This Paper

Date posted: July 19, 2012 ; Last revised: July 26, 2014

Suggested Citation

Landeo, Claudia M. and Spier, Kathryn E., Contracts as a Rent-Extraction Mechanism: An Experimental Study of Stipulated Damages under Social Preferences (July 26, 2014). Available at SSRN: http://ssrn.com/abstract=2112665 or http://dx.doi.org/10.2139/ssrn.2112665

Contact Information

Claudia M. Landeo (Contact Author)
University of Alberta - Department of Economics ( email )
Edmonton, Alberta T6G 2H4
Canada
HOME PAGE: http://www.arts.ualberta.ca/~econweb/landeo/
Kathryn E. Spier
Harvard University - Law School - Faculty ( email )
1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 833
Downloads: 60
Download Rank: 212,585
References:  56
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.407 seconds