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
Date Written: August 29, 2015
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: Suggested Citation