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

Marco Faravelli, Oliver Kirchkamp and Helmut Rainer

Munich Reprints in Economics from University of Munich, Department of Economics

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.

Date: 2013
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Published in European Economic Review 61(2013): pp. 169-185

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Journal Article: The effect of power imbalances on incentives to make non-contractible investments (2013)
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