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

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  • Faravelli, Marco
  • Kirchkamp, Oliver
  • Rainer, Helmut

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.

Suggested Citation

  • Faravelli, Marco & Kirchkamp, Oliver & Rainer, Helmut, 2013. "The effect of power imbalances on incentives to make non-contractible investments," European Economic Review, Elsevier, vol. 61(C), pages 169-185.
    • Handle: RePEc:eee:eecrev:v:61:y:2013:i:c:p:169-185
    DOI: 10.1016/j.euroecorev.2013.03.006
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    3. Koch, Christian & Nikiforakis, Nikos & Noussair, Charles N., 2021. "Covenants before the swords: The limits to efficient cooperation in heterogeneous groups," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 307-321.

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    More about this item

    Keywords

    Incomplete contracts; Relationship-specific investments; Allocation of power; Social preferences; Experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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