An Experimental Investigation of Moral Hazard in Costly Investments

Cary Deck () and Javier Reyes

Southern Economic Journal, 2008, vol. 74, issue 3, 725-746

Abstract: Frequently, parties make sequential decisions regarding investments for which the probability of success or failure is dependent on the amount of total investment. This paper reports a series of experiments involving a costly investment game that is derived from the catalytic finance model of Morris and Shin (Global games: Theory and applications. In Advances in Economics and Econometrics, Proceedings of the Eighth World Congress of the Econometric Society, edited by M. Dewatripont, L. Hansen, and S. Turnovsky. Cambridge, MA: Cambridge University Press, pp. 56‐114). The sequential nature of investments is such that the second investment could function as a complement to the initial investment or simply serve as a substitute to it, thereby creating moral hazard. The features of this game are similar to those of the ultimatum game. However, there are several key differences between the games that may account for the high frequency of materially self‐interested behavior that we observe, particularly among second movers.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/j.2325-8012.2008.tb00861.x

Related works:
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:wly:soecon:v:74:y:2008:i:3:p:725-746

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().