When contracts are incomplete or unenforceable, inefficient levels of investment may occur because of hold-up. If individuals care for negative reciprocity, these problems may be reduced, as revenge becomes a credible threat. However, negative reciprocity has this effect only when the investor holds the rights of control of the investment proceeds. We explore this issue analytically, deriving predictions for hold-up games which differ as regards assignment of rights of control. We also test and support these predictions in an experiment.
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics and Econometrics