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Discussion Paper Details

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Title: Can Contracts Solve the Hold-Up Problem? Experimental Evidence

Author(s): Eva I Hoppe-Fischer and Patrick W. Schmitz

Publication Date: March 2009

Keyword(s): Experiment, Hold-up problem, Option contracts and Renegotiation

Programme Area(s): Industrial Organization

Abstract: 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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Bibliographic Reference

Hoppe-Fischer, E and Schmitz, P. 2009. 'Can Contracts Solve the Hold-Up Problem? Experimental Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7205