Price-setting power vs. private information: An experimental evaluation of their impact on holdup

Sloof, Randolph

doi:10.1016/j.euroecorev.2007.02.008

Cited by 8 publications

(3 citation statements)

References 36 publications

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“…The most prominent theoretical solutions include vertical integration, contracting, and repeated interaction (e.g., Klein et al 1978, Williamson 1979, Grossman and Hart 1986, Hart and Moore 1990, Chung 1991, Klein and Leffler 1981, Baker et al 2002. From an experimental economics standpoint, Sloof et al (2004), Ellingsen and Johannesson (2004), and Sloof (2008) test whether investment decisions respond to the structure of the situation as theory predicts in certain settings. Most relevant to our study are works that test the role of contracts and organizational form as solutions to capacity investment problems.…”

Section: Related Literaturementioning

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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Section: Related Literaturementioning

confidence: 99%

Contracts and Capacity Investment in Supply Chains

Davis

Leider

2018

M&SOM

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“…Several articles have studied the holdup problem from behavioral perspectives. These articles study agents’ incentives to make relation‐specific investments, focusing on the issues of communication between parties (Ellingsen and Johannesson ; Charness and Dufwenberg ), private information about alternative opportunities (Sloof ), heterogeneous fairness preferences (von Siemens ), the role of contracts (Hoppe and Schmitz ), and the possibility of vengeance (Dufwenberg, Smith, and Van Essen ).…”

Section: Relationship To the Literaturementioning

confidence: 99%

Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation

Morita

Servátka

2018

Southern Economic Journal

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Ex-post opportunistic behavior, commonly present in bilateral trade relationships, is a key element of the transaction cost economics. Investment in outside options is a prime example of such opportunism and often leads to inefficiency, for example by exerting effort to search for alternative business partners even if it does not add trade value. We experimentally investigate a bilateral trade relationship in which standard theory assuming self-regarding preferences predicts that the seller will be better off by investing in the outside option to improve his bargaining position. The seller's investment, however, might negatively affect the buyer's other-regarding preferences if the investment is viewed as opportunistic. We find overall support for our hypotheses that arise from the link between other-regarding behavior and opportunism. Our findings suggest that when the transaction cost economics approach is applied to the design of a governance structure, other-regarding preferences should be taken into account. -post opportunistic behavior leads to ex-post inefficiency. This is significantly different from ex-ante inefficiency, the focus of the property-right theory of the firm (Grossman and Hart 1986;Hart and Moore 1990;Hart 1995). In the property-rights theory, the surplus (appropriable-quasi rents) created by relation-specific investment is shared between two parties through efficient bargaining. The surplus-sharing leads to inefficiency in ex-ante investment when contracts are incomplete, and the theory studies the roles of asset ownership in mitigating this ex-ante inefficiency. See Whinston (2003) and Gibbons (2005) for clear discussions on the differences between the transaction cost economics and the property-right theory of the firm. See 65 5 The derivation of conjectures based on the logic of the Revealed Altruism theory (Cox, Friedman, and Sadiraj 2008) is presented in Appendix A.

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“…1 1 See, for example, Hackett (1993, 1994), Berg et al (1995), Königstein (2000), Gantner et al (2001), Sonnemans et al (2001), Oosterbeek et al (2003), Ellingsen and Johannesson (2004a, 2004b), Fehr and List (2004), Sloof et al (2004), and Sloof (2006). …”

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confidence: 99%

Does Making Specific Investments Unobservable Boost Investment Incentives?

Sloof

Oosterbeek

Sonnemans

2007

Economics Manag Strategy

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Economic theory predicts that holdup may be alleviated by making specific investments unobservable to the non-investor. Private information creates an informational rent that boosts investment incentives. Experimental findings, however, indicate that holdup is attenuated by fairness and reciprocity considerations. Private information may interfere with this, as it becomes impossible to directly observe whether the investor behaved fair or not. In that way unobservability could crowd out the fairness/reciprocity mechanism. This paper reports on an experiment to investigate this issue empirically. Our results are in line with standard theoretical predictions when there is limited scope for fairness and reciprocity. But with sufficient scope for these motivational factors, unobservability does not boost specific investments.

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Price-setting power vs. private information: An experimental evaluation of their impact on holdup

Cited by 8 publications

References 36 publications

Contracts and Capacity Investment in Supply Chains

Contracts and Capacity Investment in Supply Chains

Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation

Does Making Specific Investments Unobservable Boost Investment Incentives?

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