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The effect of power imbalances on incentives to make non-contractible investments

  • Faravelli, Marco
  • Kirchkamp, Oliver
  • Rainer, Helmut

We use an experiment to study the effect of ex-post sharing rules on relationship-specific investments in an incomplete contracting context. We find that no power structure can induce first-best investments and that equally productive partners reach more efficient outcomes with a balanced power structure (i.e., equal sharing of returns) than with an asymmetric one. In addition, we find evidence for behavioural effects: partners make higher investments and reach higher efficiency levels than own-payoff maximisation would suggest. This behaviour is in line with a model where decision-makers care about social efficiency. It is not consistent with inequity-averse preferences.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 61 (2013)
Issue (Month): C ()
Pages: 169-185

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Handle: RePEc:eee:eecrev:v:61:y:2013:i:c:p:169-185
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