The John M. Olin Center

Paper Abstract

837. Claudia M. Landeo & Kathryn E. Spier, Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence, 09/2015; subsequently published in Journal of Institutional and Theoretical Economics, Vol. 172 (2016).

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.

837: PDF