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Can Contracts Solve the Hold-Up Problem? Experimental Evidence

Listed author(s):
  • 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 when renegotiation cannot be prevented. Ultimately, the question has to be answered empirically. As a first step in that direction, we have conducted a laboratory experiment with 490 participants. We consider "cooperative" 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 can be explained by Hart and Moore’s (2008) notion that contracts may serve as reference points.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7205.

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Date of creation: Mar 2009
Handle: RePEc:cpr:ceprdp:7205
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