Social Sciences
4 years ago

Option contracts boost investment incentives, solving hold-up problem in contracts.

Games and Economic Behavior
Can contracts solve the hold-up problem? Experimental evidence
Eva I. Hoppe, Patrick W. Schmitz

Paper Summary

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Contracts can help solve the hold-up problem, even when renegotiation is possible. A study with 960 participants showed that option contracts can improve investment incentives for the non-investing party. This means that contracts can make sure both parties stick to their agreements and benefit from investments.