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Social Welfare versus Inequality Concerns in an Incomplete Contract Experiment

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  • Marco Faravelli
  • Oliver Kirchkamp
  • Helmut Rainer

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Abstract

We study a situation where two players first choose a sharing rule, then invest into a joint production process, and then split joint benefits. We investigate how social preferences determine investments. In our experiment we find that even the materially disadvantaged player cares more for social welfare than about inequality. Behavioral preferences of disadvantaged players actually increase inequality. We also investigate when players give up an advantageous sharing rule. Power-sharing can be successful in the experiment, even when it is not in a selfish world.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-01/cesifo1_wp2933.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2933.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2933

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Related research

Keywords: experiments; incomplete contracts; relationship-specific investment; allocation of power; social preferences;

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  1. Oliver Hart & John Moore, 2006. "Contracts as Reference Points," NBER Working Papers 12706, National Bureau of Economic Research, Inc.
  2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 691-719, August.
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  8. Hackett, Steven C, 1994. "Is Relational Exchange Possible in the Absence of Reputations and Repeated Contact?," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 10(2), pages 360-89, October.
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  10. Hessel Oosterbeek & Joep Sonnemans & Susan van Velzen, 2003. "The need for marriage contracts: An experimental study," Journal of Population Economics, Springer, Springer, vol. 16(3), pages 431-453, 08.
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  13. Gantner, Anita & Guth, Werner & Konigstein, Manfred, 2001. "Equitable choices in bargaining games with joint production," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 46(2), pages 209-225, October.
  14. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points – experimental evidence," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 393, Institute for Empirical Research in Economics - University of Zurich.
  15. Morsello, Carla, 2006. "Company-community non-timber forest product deals in the Brazilian Amazon: A review of opportunities and problems," Forest Policy and Economics, Elsevier, Elsevier, vol. 8(4), pages 485-494, June.
  16. Fehr, Ernst, et al, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 16(2), pages 324-51, April.
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