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

Author

Listed:
  • Landeo, Claudia

    (University of Alberta, Department of Economics)

  • Spier, Kathryn

    (Harvard Law School)

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.

Suggested Citation

  • Landeo, Claudia & Spier, Kathryn, 2012. "It Takes Three to Tango: An Experimental Study of Contracts with Stipulated Damages," Working Papers 2012-14, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2012_014
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    More about this item

    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;
    All these keywords.

    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
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • 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
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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