Can Contracts Solve the Hold-Up Problem? Experimental Evidence

43 Pages Posted: 6 Mar 2009 Last revised: 15 Dec 2010

See all articles by Eva I. Hoppe

Eva I. Hoppe

University of Cologne - Department of Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 5, 2010

Abstract

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

Hoppe, Eva I. and Schmitz, Patrick W., Can Contracts Solve the Hold-Up Problem? Experimental Evidence (November 5, 2010). Available at SSRN: https://ssrn.com/abstract=1351777 or http://dx.doi.org/10.2139/ssrn.1351777

Eva I. Hoppe

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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