DP7205 Can Contracts Solve the Hold-Up Problem? Experimental Evidence
|Author(s):||Eva I Hoppe, Patrick W. Schmitz|
|Publication Date:||March 2009|
|Keyword(s):||Experiment, Hold-up problem, Option contracts, Renegotiation|
|JEL(s):||C72, C91, D86|
|Programme Areas:||Industrial Organization|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7205|
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.