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Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence

Journal of Institutional and Theoretical Economics, Forthcoming

47 Pages Posted: 19 Jul 2012 Last revised: 12 Sep 2015

Claudia M. Landeo

University of Alberta - Department of Economics

Kathryn E. Spier

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

Date Written: August 29, 2015

Abstract

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.

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

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

Suggested Citation

Landeo, Claudia M. and Spier, Kathryn E., Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence (August 29, 2015). Journal of Institutional and Theoretical Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2112665 or http://dx.doi.org/10.2139/ssrn.2112665

Claudia M. Landeo (Contact Author)

University of Alberta - Department of Economics ( email )

Henry Marshall Tory Building 7-25
Edmonton, Alberta T6G 2H4
Canada

HOME PAGE: http://sites.google.com/a/ualberta.ca/claudia-m-landeo-s-home-page/home

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

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