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Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence

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Listed:
  • Paolo Crosetto

    () (Max Planck Institute of Economics, Jena)

  • Alexia Gaudeul

    () (Max Planck Institute of Economics, Jena)

  • Gerhard Riener

    () (Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Düsseldorf)

Abstract

We study theoretically and experimentally a two-person partnership game whereby agents only see the uncertain outcome of their joint effort but not how much the other agent contributed to it. The model combines problems of free-riding present in public good production and in teams with imperfect monitoring. We analyse effort and exit behaviour conditional on subjects' beliefs over the action taken by their partners and consider the effect of the availability and profitability of outside options. Our subjects do not adapt effort as a response to changes in their beliefs about the effort of their partner. Subjects display aversion for team work by exiting the partnership even when they believe their partner exerts sufficient effort to sustain it. Higher outside options do not either motivate or discourage effort in joint work but rather result in not only inefficient but also irrational breakdown in partnerships. Overall, social welfare decreases as the incentive to exit increases.

Suggested Citation

  • Paolo Crosetto & Alexia Gaudeul & Gerhard Riener, 2012. "Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence," Jena Economic Research Papers 2012-052, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2012-052
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    More about this item

    Keywords

    Imperfect monitoring; outside options; partnerships; public good production; repeated games; teams;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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