Can Contracts Solve the Hold-Up Problem? Experimental Evidence
43 Pages Posted: 6 Mar 2009 Last revised: 15 Dec 2010
Date Written: November 5, 2010
In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem, in particular when renegotiation cannot be prevented. Ultimately, this question has to be answered empirically. As a first step, we have conducted a laboratory experiment with 960 participants. We consider 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 might be attributed to Hart and Moore's (2008) recent idea that contracts can serve as reference points.
Keywords: Hold-up problem, option contracts, renegotiation, experiment
JEL Classification: D86, C72, C91
Suggested Citation: Suggested Citation