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Reciprocity and Veto Power in Relation-Specific Investments: An Experimental Study

Kaiming Zheng (), Xiaoyuan Wang (), Debing Ni () and Yang Yang ()
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Kaiming Zheng: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Xiaoyuan Wang: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Debing Ni: School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China
Yang Yang: Lingnan (University) College, Sun Yat-Sen University, Guangzhou 510275, China

Sustainability, 2020, vol. 12, issue 10, 1-19

Abstract: Relation-specific investments are usually associated with great risk. Investors, afraid of being held up, are likely to invest too little, endangering both financial and organizational sustainability. Theory suggests that relation-specific investment decisions are mainly affected by potential ex-post bargaining, while experimental evidence shows social-preference-driven thinking affects both investors’ and investees’ behavior. We decompose an experimental hold-up game to identify the effect of reciprocity and the effect of veto power on investees’ transfers. In addition, we investigate the effects of corresponding information disclosures on investors’ performance as possible behavioral remedies to the hold-up problem. We find strong evidence of the effect of reciprocity and reciprocity-related information significantly lower investors’ suboptimal investment. Investors underestimate the effect of reciprocity without related information disclosure. In contrast, we find little evidence of the effect of ex-post veto power on investment decisions. Our results imply that reciprocity-related information disclosure is helpful in promoting both financial and organizational sustainability.

Keywords: reciprocity; veto power; relation-specific investment; hold-up problem; experimental economics (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2020
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