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.