Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence
Claudia M. Landeo
University of Alberta - Department of Economics; University of Alberta - Institute for Public Economics
Kathryn E. Spier
Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)
August 29, 2015
Journal of Institutional and Theoretical Economics, Forthcoming
This paper experimentally studies stipulated damages as a rent-extraction mechanism. We demonstrate that contract renegotiation induces the sellers to propose the lowest stipulated damages and the entrants to offer the highest price more frequently. We show that complete information about the entrant's cost lowers exclusion of high-cost entrants. Unanticipated findings are observed. The majority of sellers make more generous offers than expected. Rent extraction also occurs in renegotiation environments. Our findings from the dictatorial seller and buyer-entrant communication treatments suggest the presence of social preferences.
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
Date posted: July 19, 2012 ; Last revised: September 12, 2015
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