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Group Identity and Relation-Specific Investment: An Experimental Investigation

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The hold-up problem has played a central role in the study of firm boundaries, which is a fundamental element of the economic study of organizations. We study a previously unex-plored mechanism by which integration between two parties could resolve the problem. Based on the social identity theory, we conjecture that group identity strengthens agents’ altruistic prefer-ences towards group members, and this helps resolve the hold-up problem. We test this conjec-ture in a laboratory experiment. Our subjects were randomly divided into two teams and asked to wear their team uniform. Task 1 required them to answer questions about trivia, where the sub-jects had access to a chat program that enabled them to help their team members. For Task 2, the subjects played a hold-up game with either a member of their own team (representing integra-tion) or a member of the other team (non-integration). The experimental results support our conjectures.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1216.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 12/16.

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Length: 37 pages
Date of creation: 13 Nov 2012
Handle: RePEc:cbt:econwp:12/16
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