The effect of power imbalances on incentives to make non-contractible investments

Marco Faravelli, Oliver Kirchkamp and Helmut Rainer

European Economic Review, 2013, vol. 61, issue C, 169-185

Abstract: We use an experiment to study the effect of ex-post sharing rules on relationship-specific investments in an incomplete contracting context. We find that no power structure can induce first-best investments and that equally productive partners reach more efficient outcomes with a balanced power structure (i.e., equal sharing of returns) than with an asymmetric one. In addition, we find evidence for behavioural effects: partners make higher investments and reach higher efficiency levels than own-payoff maximisation would suggest. This behaviour is in line with a model where decision-makers care about social efficiency. It is not consistent with inequity-averse preferences.

Keywords: Incomplete contracts; Relationship-specific investments; Allocation of power; Social preferences; Experiments (search for similar items in EconPapers)
JEL-codes: C91 D23 D86 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: The effect of power imbalances on incentives to make non-contractible investments (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:61:y:2013:i:c:p:169-185

DOI: 10.1016/j.euroecorev.2013.03.006

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