Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence

Claudia Landeo and Kathryn E. Spier

Journal of Institutional and Theoretical Economics (JITE), 2016, vol. 172, issue 2, 235-273

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.

JEL-codes: C72 C91 D86 K12 K21 L42 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence (2015)
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DOI: 10.1628/093245616X14534707121162

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