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Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence

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  • Claudia M. Landeo
  • Kathryn E. Spier

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.

Suggested Citation

  • Claudia M. Landeo & Kathryn E. Spier, 2016. "Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 235-273, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201606)172:2_235:sdaarm_2.0.tx_2-6
    DOI: 10.1628/093245616X14534707121162
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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