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Incentive Compatible Contracts?

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  • Lisa Bruttel
  • Gerald Eisenkopf

Abstract

Property rights theory suggests that vertical integration is a sensible solution to hold-up problems and therefore improves social welfare. Theories of reciprocity, in contrast, suggest that vertical integration can reduce social welfare if it implies an unfair distribution. Translating the hold-up situation into a simple prisoners’ dilemma game, we provide experimental evidence for social preferences at the individual level. Some individuals behave conditionally cooperative in the hold-up situation and some do not cooperate when they are offered an incentive compatible but unfair contract. Nevertheless, property rights theory correctly predicts that vertical integration increases aggregate welfare even in the case of unfair outcomes.

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Bibliographic Info

Paper provided by Thurgauer Wirtschaftsinstitut, Universität Konstanz in its series TWI Research Paper Series with number 43.

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Date of creation: 2009
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Handle: RePEc:twi:respas:0043

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Keywords: Prisoners’ Dilemma; Hold-up Problem; Experiment;

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Cited by:
  1. Simon Gaechter & Daniele Nosenzo & Elke Renner & Martin Sefton, 2009. "Who Makes A Good Leader? Cooperativeness, Optimism And Leading-By-Example," Discussion Papers 2009-19, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  2. Mathias Erlei & Wiebke Roß, 2013. "Bounded Rationality as an Essential Ingredient of the Holdup Problem," TUC Working Papers in Economics 0009, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).

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