Eva I. Hoppe and Patrick W. Schmitz
Games and Economic Behavior, Vol. 73 (1), 2011, 186-199.
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.
The working paper version is available for download (CEPR Discussion Paper 7205).
Another working paper version is available for download at SSRN.
The paper is available for download.