The effect of power imbalances on incentives to make non-contractible investments

Faravelli, Marco, Kirchkamp, Oliver and Rainer, Helmut (2013) The effect of power imbalances on incentives to make non-contractible investments. European Economic Review, 61 169-185. doi:10.1016/j.euroecorev.2013.03.006

Author Faravelli, Marco
Kirchkamp, Oliver
Rainer, Helmut
Title The effect of power imbalances on incentives to make non-contractible investments
Journal name European Economic Review   Check publisher's open access policy
ISSN 0014-2921
Publication date 2013-07
Sub-type Article (original research)
DOI 10.1016/j.euroecorev.2013.03.006
Volume 61
Start page 169
End page 185
Total pages 17
Place of publication Netherlands
Publisher Elsevier North-Holland
Collection year 2014
Language eng
Formatted abstract
• We study investments in a partnership with fixed profit sharing.
• If players are selfish these investments are inefficiently low.
• In a lab experiment investments are significantly higher than selfish investments.
• Participants show concerns for social welfare, no inequality aversion, no competitive preferences.
• Participants share power.

We 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 inequity-averse preferences.
Keyword Incomplete contracts
Relationship-specific investments
Allocation of power
Social preferences
Inequality aversion
Maximin preferences
Social preferences
Reference points
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2014 Collection
School of Economics Publications
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