The Effect of Power Imbalances on Incentives to Make Non-Contractible Investments
Marco Faravelli and Oliver Kirchkamp and Helmut RainerWe use an experiment to study the effect of ex-post sharing rules on relationship-specific investments in an incomplete contracting context. We find that no power structure can induce first-best investments and that equally productive partners reach more efficient outcomes with a balanced power structure (i.e., equal sharing of returns) than with an asymmetric one. In addition, we find evidence for behavioural effects: partners make higher investments and reach higher efficiency levels than own-payoff maximisation would suggest. This behaviour is in line with a model where decision-makers care about social efficiency. It is not consistent with inequality-averse preferences.
JEL-Classification: C91, D23, D86
Keywords: Incomplete Contracts, Relationship-Specific Investment, Allocation of Power, Social Preferences, Experiments.
- An earlier version of this paper circulated under the title ``Social welfare versus inequality aversion in an incomplete contract experiment''. This paper is available as a Jena Economc Research Paper 2009-016.
- A more recent version (as of January 2010) is CESifo Working Paper No. 2933
- Here is the most recent version as of September 21, 2012.
- On March 26, 2013, the paper has been accepted for publication at the European Economic Review, Vol. 61, pp. 169-185.