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Group Identity and Relation-Specific Investment: An Experimental Investigation

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Abstract

The hold-up problem has played a central role in the study of firm boundaries that originated with the pathbreaking essay by Coase (1937). This paper studies a previously unexplored mechanism through which integration could resolve the hold-up problem. Based on Tajfel and Turner’s (1979) social identification theory, we conjecture that team membership increases the degree of altruism towards another team member, and this in turn helps resolving the hold-up problem. We test this conjecture in a laboratory experiment. Our subjects are randomly divided into two teams and given their respective team uniforms to wear. In Task 1 they answer two trivia questions and can use a chat program to help their team members. In Task 2 the subjects play a standard hold-up game with a member of their own team (representing integration) or with a member of the other team (non-integration). We find that team membership significantly increases the investment rate as well as the share of the surplus offered back to the investor and thus mitigates the hold-up problem.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1101.pdf
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Bibliographic Info

Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 11/01.

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Length: 28 pages
Date of creation: 19 Jan 2011
Date of revision:
Handle: RePEc:cbt:econwp:11/01

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Keywords: altruism; experiment; hold-up problem; identity; integration; other-regarding preferences; relation-specific investment; team membership;

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Cited by:
  1. Weng, Qian, 2013. "Session Size and its Effect on Identity Building: Evidence from a public goods experiment," Working Papers in Economics 560, University of Gothenburg, Department of Economics.
  2. Hodaka Morita & Maroš Servátka, 2011. "Symbols, Group Identity and the Hold-up Problem," Working Papers in Economics 11/38, University of Canterbury, Department of Economics and Finance.

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