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Social welfare versus inequality aversion in an incomplete contract experiment

Author

Listed:
  • Marco Faravelli

    (School of Economics and Finance, University of St. Andrews)

  • Oliver Kirchkamp

    (Department of Economics, University of Jena, Germany)

  • Helmut Rainer

    (School of Economics and Finance, University of St. Andrews)

Abstract

We explore experimentally how power asymmetries between partners affect relationship-specific investments. We find that on average players’ investments are larger than equilibrium investments. In contrast to social dilemma experiments, in our experiment preferences for social welfare and those for equality call for different actions. Surprisingly, even disadvantaged players care more for social welfare and less for equality. As a result social welfare increases but so does inequality. We then study conditions under which power-advantaged players give up power. Power-sharing can be successful in the experiment, even when it is not in a selfish world.

Suggested Citation

  • Marco Faravelli & Oliver Kirchkamp & Helmut Rainer, 2009. "Social welfare versus inequality aversion in an incomplete contract experiment," Jena Economics Research Papers 2009-016, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2009-016
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2009/wp_2009_016.pdf
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    Citations

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    Cited by:

    1. Bruttel, Lisa & Eisenkopf, Gerald, 2012. "No contract or unfair contract: What's better?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 384-390.
    2. Faravelli, Marco & Kirchkamp, Oliver & Rainer, Helmut, 2013. "The effect of power imbalances on incentives to make non-contractible investments," European Economic Review, Elsevier, vol. 61(C), pages 169-185.

    More about this item

    Keywords

    Experiments; Incomplete Contracts; Relationship-Specific Investment; Allocation of Power; Social Preferences;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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