Does Making Specific Investments Unobservable Boost Investment Incentives?

32 Pages Posted: 5 Nov 2007

See all articles by Randolph Sloof

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Abstract

Standard theory predicts that holdup can be alleviated by making specific investments unobservable; private information creates an informational rent that boosts investment incentives. Empirical findings, however, indicate that holdup is attenuated by fairness and reciprocity motivations. Private information may interfere with these, as it becomes impossible to observe whether the investor behaved fair or not. In that way unobservability could crowd out an informal fairness/reciprocity mechanism in place. This paper reports on an experiment to investigate this issue empirically. Our results are in line with standard predictions when there is limited scope for social preferences. But with sufficient scope for these motivational factors, unobservability does not boost specific investments.

Suggested Citation

Sloof, Randolph and Oosterbeek, Hessel and Sonnemans, Joep, Does Making Specific Investments Unobservable Boost Investment Incentives?. Journal of Economics & Management Strategy, Vol. 16, Issue 4, pp. 911-942, Winter 2007, Available at SSRN: https://ssrn.com/abstract=1027081 or http://dx.doi.org/10.1111/j.1530-9134.2007.00162.x

Randolph Sloof (Contact Author)

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

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Tinbergen Institute ( email )

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Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Amsterdam
Netherlands
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+31 20 525 5283 (Fax)

HOME PAGE: http://www.fee.uva.nl/scholar/oosterbeek/

Tinbergen Institute Amsterdam (TIA)

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Rotterdam, 3062 PA
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Institute for the Study of Labor (IZA)

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Bonn, D-53072
Germany

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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