Long-term work contracts versus sequential spot markets: Experimental evidence on firm-specific investment

Vital Anderhub, Manfred Königstein and Dorothea Kübler

No 1999,43, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: Dismissal rules, i.e. legally enforced long term contracts, have beem defended against criticism for, among other things, providing efficient incentives to invest in relationship specific skills. However, in many situations efficient investment can also be attained by spot contracts. We replicate such a situation with our experimental design based on a simple two period game, involving the choke of the contract; length by the principal and an investment choke by the agent. In contrast to the game theoretic predictions, we find that investment of the worker and length of contract; are strictly positively correlated. We interpret our finding as an indication for a perceived market risk due to other players' actions although the model is fully deterministic. This could imply a behaviorally relevant difference between contract and market administered incentives.

Keywords: principal agent; experiment; specific human capital (search for similar items in EconPapers)
JEL-codes: D82 D83 J41 J64 (search for similar items in EconPapers)
Date: 1999
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Journal Article: Long-term work contracts versus sequential spot markets: experimental evidence on firm-specific investment (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:199943

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