|dc.description.abstract||In their influential paper, Aghion and Bolton (1987) argue that a
buyer and a seller may agree on high liquidation damages in order to
extract rents from future suppliers. As this may distort future trade,
it may be socially wasteful.
We argue that Aghion and Bolton's analysis of entry is incomplete
in some respects, as there is only one potential entrant in their model.
We construct a model with many potential entrants. Entry is costly,
so entering suppliers have to earn a quasi-rent in order to recoup
their entry costs. Reducing the entrants' profits by the help of a
breach penalty reduces the probability of entry, and this reduces the
attractiveness of breach penalties for the contracting parties.
We show that the initial buyer and seller only have incentives to
include a positive breach penalty if there is excessive entry without it,
in which case the breach penalty is welfare improving.||no_NO