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Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence

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  • Paolo Crosetto

    ()
    (Max Planck Institute of Economics, Jena)

  • Alexia Gaudeul

    ()
    (Max Planck Institute of Economics, Jena)

  • Gerhard Riener

    ()
    (Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Düsseldorf)

Abstract

We study theoretically and experimentally a two-person partnership game whereby agents only see the uncertain outcome of their joint effort but not how much the other agent contributed to it. The model combines problems of free-riding present in public good production and in teams with imperfect monitoring. We analyse effort and exit behaviour conditional on subjects' beliefs over the action taken by their partners and consider the effect of the availability and profitability of outside options. Our subjects do not adapt effort as a response to changes in their beliefs about the effort of their partner. Subjects display aversion for team work by exiting the partnership even when they believe their partner exerts sufficient effort to sustain it. Higher outside options do not either motivate or discourage effort in joint work but rather result in not only inefficient but also irrational breakdown in partnerships. Overall, social welfare decreases as the incentive to exit increases.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2012-052.

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Date of creation: 11 Sep 2012
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Handle: RePEc:jrp:jrpwrp:2012-052

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Keywords: Imperfect monitoring; outside options; partnerships; public good production; repeated games; teams;

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