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

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  • Anderhub, Vital
  • Konigstein, Manfred
  • Kubler, Dorothea

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. --

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 10 (2003)
Issue (Month): 4 (August)
Pages: 407-425

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Handle: RePEc:eee:labeco:v:10:y:2003:i:4:p:407-425

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Cited by:
  1. Charness, Gary & Kuhn, Peter J., 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," IZA Discussion Papers 4941, Institute for the Study of Labor (IZA).
  2. Güth, Werner & Kocher, Martin G. & Popova, Vera, 2012. "Co-employment of permanently and temporarily employed agents," Munich Reprints in Economics 18169, University of Munich, Department of Economics.
  3. Bernhard Ganglmair, 2008. "Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking," JEPS Working Papers 08-001, JEPS.

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