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

Claudia Landeo () and Kathryn Spier ()
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Claudia Landeo: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4
Kathryn Spier: Harvard Law School, Postal: 1563 Massachusetts Ave, Cambridge, MA 02138

No 2012-14, Working Papers from University of Alberta, Department of Economics

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.

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 (search for similar items in EconPapers)
JEL-codes: C72 C91 D62 D86 K12 K21 K41 L12 L42 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2012-07-01
New Economics Papers: this item is included in nep-exp
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