Social welfare versus inequality aversion in an incomplete contract experiment
AbstractWe present the first laboratory study showing that concerns for social welfare are key determinants of investment behavior in a world of incomplete contracting. Two equally productive players simultaneously decide how much to invest into a joint production process. The total monetary benefit from joint production is split according to a sharing rule which may be symmetric or asymmetric. Standard equilibrium predictions imply inefficiently low investments and unequal payoff distributions. We show that concerns for social welfare and inequality aversion call for opposite investment choices. In the experiment, participants reveal a concern for social welfare but appear not to care about inequality. As a consequence, observed investments are larger than equilibrium investments in a selfish world. Surprisingly, even materially disadvantaged players care more for social welfare than for equality. Social welfare therefore increases but so does inequality. We also study conditions under which players give 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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Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0902.
Date of creation: Feb 2009
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Experiments; Incomplete Contracts; Relationship-Specific Investment; Allocation of Power; Social Preferences.;
Other versions of this item:
- Marco Faravelli & Oliver Kirchkamp & Helmut Rainer, 2009. "Social welfare versus inequality aversion in an incomplete contract experiment," Jena Economic Research Papers 2009-016, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-22 (All new papers)
- NEP-EXP-2009-03-22 (Experimental Economics)
- NEP-UPT-2009-03-22 (Utility Models & Prospect Theory)
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