Can Contracts Solve the Hold-Up Problem? Experimental Evidence

Hoppe, Eva I.; Schmitz, Patrick W.

doi:10.2139/ssrn.1351777

Cited by 26 publications

(30 citation statements)

References 70 publications

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“…Brandts et al (2013) explore the role of contractual reference points in a setup without ex-ante competition and show that informal agreements may have a larger impact in purely bilateral environments. Hoppe and Schmitz (2011), Bartling and Schmidt (2014), and Iyer and Schoar (2012) report evidence consistent with our finding that opportunistic renegotiations are perceived as unfair and trigger lots of shading. We discuss these papers in much more detail after the presentation of our results (see Section 5).…”

Section: Introductionsupporting

confidence: 90%

How Do Informal Agreements and Revision Shape Contractual Reference Points?

Fehr

Hart

Zehnder

2014

Journal of the European Economic Association

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The notion of contracts as reference points provides the basis for a deeper understanding of important phenomena such as the employment contract, vertical integration, firm scope, authority, and delegation. Previous experiments lend support to this notion but they ignore realistic aspects of trading relationships such as informal agreements and ex‐post renegotiation or revision. Here we show that the central behavioral mechanism underlying contractual reference points is robust to such considerations. Our data reveal that informal agreements can mitigate the trade‐off between rigidity and flexibility but they do not fully resolve the problem of misaligned reference points. Our experiments also show that contract revision is a more nuanced process than the previous literature has recognized. We find, for example, that it is sometimes better for parties to write a simple (rigid) contract and then revise it ex post if needed, rather than to anticipate and include future contingencies in a (flexible) contract from the outset.

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Section: Introductionsupporting

confidence: 90%

How Do Informal Agreements and Revision Shape Contractual Reference Points?

Fehr

Hart

Zehnder

2014

Journal of the European Economic Association

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“…While a number of papers have analyzed capacity investment problems from a theoretical standpoint, only a few experimental studies exist on the topic (e.g., Hoppe and Schmitz 2011). Many of these assume settings with deterministic demand and simplified Davis andLeider: Contracts andCapacity Investment in Supply Chains 404 Manufacturing &Service Operations Management, 2018, vol.…”

Section: Introductionmentioning

confidence: 99%

Contracts and Capacity Investment in Supply Chains

Davis

Leider

2018

M&SOM

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Suppliers are often reluctant to invest in capacity if they believe that they will be unable to recover their investment costs in subsequent transactions with buyers. In theory, a number of different contracts can solve this issue and induce first-best investment levels by the supplier. In this study, we investigate the performance of these contracts in a two-tier supply chain. We develop an experimental design where retailers and suppliers bargain over contract terms-and have the ability to make multiple back-and-forth offers-while also providing feedback on the offers they receive. One key result from our study is that an option contract and a service-level agreement are best at increasing first-best investment levels and overall supply chain profits. However, these same contracts also generate the largest inequity in expected profits between the two parties. We find that both of these results are driven by the bargaining tendencies of retailers and suppliers, which we refer to as "superficial fairness." In particular, retailers and suppliers place more emphasis on negotiating the wholesale price, while partially overlooking any secondary parameter, such that final wholesale prices end up roughly halfway between the retailer's selling price and the supplier's production cost. We show that this bargaining behavior contributes to higher investment levels observed in the option contract and service-level agreement, along with the inequitable payoffs.

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“…Lastly, we are related to a growing experimental literature that studies contracting and bargaining in laboratory settings (see for example Zehnder, 2009 andHoppe and Schmitz, 2011;Bartling and Schmidt, 2013). In particular Bartling and Schmidt (2013) are close in spirit to our paper.…”

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confidence: 99%

Ex Post (In) Efficient Negotiation and Breakdown of Trade

Iyer¹,

Schoar²

2015

American Economic Review

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Using a novel audit methodology, we show that reputation concerns and norms against price gouging can lead to breakdown in ex post efficient trade. Sellers in a market in India do not use their increased bargaining power to charge higher prices when customers have a shock, but, rather, forgo the order. However, when customers offer a higher price, sellers are significantly more likely to accept the order. When reputation costs are lower (out of state customers), sellers are more willing to initiate renegotiation. These results suggest that there are first order distortions to ex post efficient renegotiation.

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Can Contracts Solve the Hold-Up Problem? Experimental Evidence

Cited by 26 publications

References 70 publications

How Do Informal Agreements and Revision Shape Contractual Reference Points?

How Do Informal Agreements and Revision Shape Contractual Reference Points?

Contracts and Capacity Investment in Supply Chains

Ex Post (In) Efficient Negotiation and Breakdown of Trade

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