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Can contracts solve the hold-up problem? Experimental evidence

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

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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File URL: http://www.sciencedirect.com/science/article/pii/S0899825610001818
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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 73 (2011)
Issue (Month): 1 (September)
Pages: 186-199

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Handle: RePEc:eee:gamebe:v:73:y:2011:i:1:p:186-199
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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