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It Takes Three to Tango: An Experimental Study of Contracts with Stipulated Damages

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  • Landeo, Claudia

    ()
    (University of Alberta, Department of Economics)

  • Spier, Kathryn

    ()
    (Harvard Law School)

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    Abstract

    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.

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    Bibliographic Info

    Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2012-14.

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    Length: 61 pages
    Date of creation: 01 Jul 2012
    Date of revision:
    Handle: RePEc:ris:albaec:2012_014

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    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;

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    1. Claudia M. Landeo & Kathryn E. Spier, 2012. "Exclusive Dealing and Market Foreclosure: Further Experimental Results," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 168(1), pages 150-170, March.
    2. Werner Güth & Carsten Schmidt & Matthias Sutter, 2005. "Bargaining Outside the Lab – A Newspaper Experiment of a Three-Person Ultimatum Game," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2002-11, Max Planck Institute of Economics, Strategic Interaction Group.
    3. Fershtman, Chaim & Gneezy, Uri & List, John, 2008. "Equity Aversion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6853, C.E.P.R. Discussion Papers.
    4. Richard R. W. Brooks & Claudia M. Landeo & Kathryn E. Spier, 2010. "Trigger happy or gun shy? Dissolving common-value partnerships with Texas shootouts," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 41(4), pages 649-673.
    5. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, Elsevier, vol. 6(3), pages 347-369, May.
    6. Martin Dufwenberg & Alec Smith & Matt Van Essen, 2013. "Hold-Up: With A Vengeance," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 51(1), pages 896-908, 01.
    7. Ziss, Steffen, 1996. "Contracts as a Barrier to Entry: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 86(3), pages 672-74, June.
    8. Claudia M. Landeo & Kathryn E. Spier, 2009. "Naked Exclusion: An Experimental Study of Contracts with Externalities," American Economic Review, American Economic Association, American Economic Association, vol. 99(5), pages 1850-77, December.
    9. Peter Cramton & Alan Schwartz, 1991. "Using Auction Theory to Inform Takeover Regulation," Papers of Peter Cramton 91jleo, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
    10. John Kagel & Katherine Wolfe, 2001. "Tests of Fairness Models Based on Equity Considerations in a Three-Person Ultimatum Game," Experimental Economics, Springer, Springer, vol. 4(3), pages 203-219, December.
    11. Ed Hopkins & Tatiana Kornienko, 2004. "Running to Keep in the Same Place: Consumer Choice as a Game of Status," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1085-1107, September.
    12. Landeo, Claudia M., 2009. "Cognitive coherence and tort reform," Journal of Economic Psychology, Elsevier, Elsevier, vol. 30(6), pages 898-912, December.
    13. Bereby-Meyer, Yoella & Niederle, Muriel, 2005. "Fairness in bargaining," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(2), pages 173-186, February.
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