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Incomplete Contracting: A Laboratory Experimental Analysis

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  • Hackett, Steven C
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    Abstract

    Incomplete contracts are motivated by difficulties in specifying contingent responses to unforeseen change in long-term trading relationships. The issues can be parsimoniously represented. in a two-period model. Parties first make transaction-specific investme nt that enhances value or reduces cost. Surplus is then realized, and bargaining divides the surplus and completes the contract. The testa ble hypothesis is that realized surplus shares are independent of sunk investments. This is strongly rejected using laboratory experimental methods. Failure of the prediction affects the expected profitabilit y of contracts. Copyright 1993 by Oxford University Press.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Economic Inquiry.

    Volume (Year): 31 (1993)
    Issue (Month): 2 (April)
    Pages: 274-97

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    Handle: RePEc:oup:ecinqu:v:31:y:1993:i:2:p:274-97

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    Cited by:
    1. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Can Contracts Solve the Hold-Up Problem? Experimental Evidence," CEPR Discussion Papers 7205, C.E.P.R. Discussion Papers.
    2. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer, vol. 5(1), pages 5-27, June.
    3. 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.
    4. L. Bagnoli & G. Negroni, 2012. "On the coevolution of social norms in primitive societies," Working Papers wp858, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Philipp C. Wichardt & Daniel Schunk & Patrick W. Schmitz, 2008. "Participation costs for responders can reduce rejection rates in ultimatum bargaining," IEW - Working Papers 398, Institute for Empirical Research in Economics - University of Zurich.
    6. Randolph Sloof, 2003. "Price-setting Power versus Private Information," Tinbergen Institute Discussion Papers 03-099/1, Tinbergen Institute.
    7. Mathias Erlei & Philipp Siemer, 2004. "Endogenous Property Rights in a Hold up-Experiment," TUC Working Papers in Economics 0002, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).
    8. Jongwook Kim & Joseph T. Mahoney, 2005. "Property rights theory, transaction costs theory, and agency theory: an organizational economics approach to strategic management," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 223-242.
    9. Mathias Erlei & Wiebke Roß, 2013. "Bounded Rationality as an Essential Ingredient of the Holdup Problem," TUC Working Papers in Economics 0009, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).
    10. Thomas Ehrmann & Karl-Hans Hartwig & Torsten Marner & Hendrik Schmale, 2009. "Specific Investments and Ownership Structures in Railways – An Experimental Analysis," Working Papers 12, Institute of Transport Economics, University of Muenster.
    11. Randolph Sloof, 2003. "Price-setting Power versus Private Information," Tinbergen Institute Discussion Papers 03-099/1, Tinbergen Institute.

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