Social welfare versus inequality aversion in an incomplete contract experiment

Marco Faravelli and Oliver Kirchkamp and Helmut Rainer

We study a situation where two players first choose a sharing rule, then invest into a joint production process, and then split joint benefits. We investigate how social preferences determine investments.
In our experiment we find that even the materially disadvantaged player cares more for social welfare than about inequality. Behavioral preferences of disadvantaged players actually increase inequality.
We also investigate when players give up an advantageous sharing rule. Power-sharing can be successful in the experiment, even when it is not in a selfish world.

JEL-Classification: C91, D23, D86

Keywords: Experiments, Incomplete Contracts, Relationship-Specific Investment, Allocation of Power, Social Preferences.

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This paper is available as a Jena Economc Research Paper 2009-016.
Here is a more recent version as of 22 January 2010.

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