Of the Stability of Partnerships When Individuals Have Outside Options, or Why Allowing Exit is Inefficient

Jena Economic Research Papers 2015 - 001

61 Pages Posted: 17 Jan 2015 Last revised: 18 Jun 2015

See all articles by Alexia Gaudeul

Alexia Gaudeul

Georg-August-Universität Göttingen

Paolo Crosetto

Grenoble Applied Economics Laboratory

Gerhard Riener

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE)

Date Written: January 6, 2015

Abstract

Should people be allowed to leave joint projects freely or should they be deterred from breaking off? This depends on why people stop collaborating and whether they have good reasons to do so. We explore the factors that lead to the breakdown of partnerships by studying a public good game with imperfect public monitoring and an exit option. In our experiment, subjects were assigned a partner with whom they could contribute over several periods to a public good with stochastic outcomes. They could choose in each period between participating in the public project or working on their own. We find there was excessive exit especially because subjects over-estimated the likelihood their partner would leave. Treatments with high barriers to exit generated higher welfare overall as they fostered stability and prevented inefficient breakdowns in relationships. There were differences across treatments in the intensity with which different factors drove the choice to work alone. Differences in expected payoffs between independent and group work were more important as a driver of exit in treatments with low barriers to exit. The intensity of other factors was more constant across treatments, including whether the common project failed in the previous period, the belief that one's partner did not want to maintain the partnership and the belief that he exerted less effort than oneself.

Keywords: barriers to exit, cooperation, outside option, imperfect public monitoring, partnerships, public good game, repeated game, social risk

JEL Classification: C23, C92, H41

Suggested Citation

Gaudeul, Alexia and Crosetto, Paolo and Riener, Gerhard, Of the Stability of Partnerships When Individuals Have Outside Options, or Why Allowing Exit is Inefficient (January 6, 2015). Jena Economic Research Papers 2015 - 001. Available at SSRN: https://ssrn.com/abstract=2550756 or http://dx.doi.org/10.2139/ssrn.2550756

Alexia Gaudeul (Contact Author)

Georg-August-Universität Göttingen ( email )

Platz der Goettinger Sieben 3
Goettingen, 37073
Germany
+49 (0) 551 39 7333 (Phone)

HOME PAGE: http://agaudeul.free.fr

Paolo Crosetto

Grenoble Applied Economics Laboratory ( email )

BP 47
38040 Grenoble
France

Gerhard Riener

Heinrich Heine University Dusseldorf - Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

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