The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining Between Inequity-Averse Agents
AbstractWhen investments are specific to a relationship and contracting possibilities are incomplete, the efficiency of a joint venture may be severely impaired by ex-post opportunistic and hold-up type behavior. How is the logic of this argument affected by inequity aversion? In this paper I show that incentives to invest are stronger with inequity aversion because a higher investment by an individual agent increases not only the total surplus to be divided, but also, generally, the relative share of the surplus obtained by this agent in the ex-post negotiation. In fact, when production is sufficiently profitable and agents are sufficiently patient, then first-best investment levels may be approximated without any contract.
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Bibliographic InfoArticle provided by LMU Munich School of Management in its journal Schmalenbach Business Review.
Volume (Year): 58 (2006)
Issue (Month): 2 (April)
Alternating-Offers Bargaining; Inequity Aversion; Hold-Up Problem;
Find related papers by JEL classification:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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- 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.
- Christian Korth & Stefan Napel, 2008.
"Fairness, Price Stickiness, and History Dependence in Decentralized Trade,"
064, Bavarian Graduate Program in Economics (BGPE).
- Korth, Christian & Napel, Stefan, 2009. "Fairness, price stickiness, and history dependence in decentralized trade," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 502-514, August.
- Christian Korth & Stefan Napel, 2009. "Fairness, Price Stickiness, and History Dependence in Decentralized Trade," Working Papers 068, Bavarian Graduate Program in Economics (BGPE).
- Hoppe, Eva I. & Schmitz, Patrick W., 2011.
"Can contracts solve the hold-up problem? Experimental evidence,"
Games and Economic Behavior,
Elsevier, vol. 73(1), pages 186-199, September.
- 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.
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