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Incentive Compatible Contracts?

  • Lisa Bruttel
  • Gerald Eisenkopf

Property rights theory suggests that vertical integration is a sensible solution to hold-up problems and therefore improves social welfare. Theories of reciprocity, in contrast, suggest that vertical integration can reduce social welfare if it implies an unfair distribution. Translating the hold-up situation into a simple prisoners� dilemma game, we provide experimental evidence for social preferences at the individual level. Some individuals behave conditionally cooperative in the hold-up situation and some do not cooperate when they are offered an incentive compatible but unfair contract. Nevertheless, property rights theory correctly predicts that vertical integration increases aggregate welfare even in the case of unfair outcomes.

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Paper provided by Thurgauer Wirtschaftsinstitut, Universit�t Konstanz in its series TWI Research Paper Series with number 43.

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Date of creation: 2009
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Handle: RePEc:twi:respas:0043
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