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Does Making Specific Investments Unobservable Boost Investment Incentives?

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Author Info

  • Randolph Sloof
  • Hessel Oosterbeek
  • Joep Sonnemans

Abstract

"Standard theory predicts that holdup can be alleviated by making specific investments unobservable; private information creates an informational rent that boosts investment incentives. Empirical findings, however, indicate that holdup is attenuated by fairness and reciprocity motivations. Private information may interfere with these, as it becomes impossible to observe whether the investor behaved fair or not. In that way unobservability could crowd out an informal fairness/reciprocity mechanism in place. This paper reports on an experiment to investigate this issue empirically. Our results are in line with standard predictions when there is limited scope for social preferences. But with sufficient scope for these motivational factors, unobservability does not boost specific investments." Copyright 2007, The Author(s) Journal Compilation (c) 2007 Blackwell Publishing.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 16 (2007)
Issue (Month): 4 (December)
Pages: 911-942

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Handle: RePEc:bla:jemstr:v:16:y:2007:i:4:p:911-942

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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Cited by:
  1. Hodaka Morita & Maroš Servátka, 2012. "Group Identity and Relation-Specific Investment: An Experimental Investigation," Working Papers in Economics 12/16, University of Canterbury, Department of Economics and Finance.
  2. Kübler, Dorothea & Müller, Wieland & Normann, Hans-Theo, 2005. "Job Market Signaling and Screening: An Experimental Comparison," IZA Discussion Papers 1794, Institute for the Study of Labor (IZA).
  3. Randolph Sloof, 2003. "Price-setting Power versus Private Information," Tinbergen Institute Discussion Papers 03-099/1, Tinbergen Institute.
  4. Sloof, Randolph & Sonnemans, Joep, 2011. "The interaction between explicit and relational incentives: An experiment," Games and Economic Behavior, Elsevier, vol. 73(2), pages 573-594.
  5. von Siemens, Ferdinand A., 2009. "Bargaining under incomplete information, fairness, and the hold-up problem," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 486-494, August.
  6. Sloof, Randolph, 2008. "Price-setting power vs. private information: An experimental evaluation of their impact on holdup," European Economic Review, Elsevier, vol. 52(3), pages 469-486, April.
  7. Lisa Bruttel & Gerald Eisenkopf, 2009. "Incentive Compatible Contracts?," TWI Research Paper Series 43, Thurgauer Wirtschaftsinstitut, Universität Konstanz.

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