Discussion paper

DP7205 Can Contracts Solve the Hold-Up Problem? Experimental Evidence

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.


Schmitz, P and E Hoppe-Fischer (eds) (2009), “DP7205 Can Contracts Solve the Hold-Up Problem? Experimental Evidence”, CEPR Press Discussion Paper No. 7205. https://cepr.org/publications/dp7205