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Can contracts solve the hold-up problem? Experimental evidence

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  • Hoppe, Eva I.
  • Schmitz, Patrick W.

Abstract

In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem, in particular when renegotiation cannot be prevented. Ultimately, this question has to be answered empirically. As a first step, we have conducted a laboratory experiment with 960 participants. We consider investments that directly benefit the non-investing party. While according to standard theory, contracting would be useless if renegotiation cannot be ruled out, we find that option contracts significantly improve investment incentives compared to a no-contract treatment. This finding might be attributed to Hart and Moore's (2008) recent idea that contracts can serve as reference points.

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  • Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    • Handle: RePEc:eee:gamebe:v:73:y:2011:i:1:p:186-199
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    More about this item

    Keywords

    Hold-up problem Option contracts Renegotiation Experiment;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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