Incentive Compatible Contracts?

Lisa V. Bruttel () and Gerald Eisenkopf

No 43, TWI Research Paper Series from Thurgauer Wirtschaftsinstitut, Universität Konstanz

Abstract: Property rights theory suggests that vertical integration is a sensible solution to hold-up problems and therefore improves social welfare. Theories of reciprocity, in contrast, suggest that vertical integration can reduce social welfare if it implies an unfair distribution. Translating the hold-up situation into a simple prisoners’ dilemma game, we provide experimental evidence for social preferences at the individual level. Some individuals behave conditionally cooperative in the hold-up situation and some do not cooperate when they are offered an incentive compatible but unfair contract. Nevertheless, property rights theory correctly predicts that vertical integration increases aggregate welfare even in the case of unfair outcomes.

Keywords: Prisoners’ Dilemma; Hold-up Problem; Experiment (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-exp
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:twi:respas:0043

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