Can Contracts Solve the Hold-Up Problem? Experimental Evidence

Patrick Schmitz and Eva Hoppe

No 7205, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem when renegotiation cannot be prevented. Ultimately, the question has to be answered empirically. As a first step in that direction, we have conducted a laboratory experiment with 490 participants. We consider "cooperative" investments that directly benefit the non-investing party. While according to standard theory, contracting would be useless if renegotiation cannot be ruled out, we find that option contracts significantly improve investment incentives compared to a no-contract treatment. This finding can be explained by Hart and Moore?s (2008) notion that contracts may serve as reference points.

Keywords: Experiment; Hold-up problem; Option contracts; Renegotiation (search for similar items in EconPapers)
JEL-codes: C72 C91 D86 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cta, nep-exp and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://cepr.org/publications/DP7205 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Can contracts solve the hold-up problem? Experimental evidence (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:7205

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP7205

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().