Can contracts solve the hold-up problem? Experimental evidence

Eva Hoppe and Patrick Schmitz

Games and Economic Behavior, 2011, vol. 73, issue 1, 186-199

Abstract: In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem, in particular when renegotiation cannot be prevented. Ultimately, this question has to be answered empirically. As a first step, we have conducted a laboratory experiment with 960 participants. We consider 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 might be attributed to Hart and Moore's (2008) recent idea that contracts can serve as reference points.

Keywords: Hold-up; problem; Option; contracts; Renegotiation; Experiment (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (77)

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Working Paper: Can Contracts Solve the Hold-Up Problem? Experimental Evidence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:73:y:2011:i:1:p:186-199

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