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The effect of sunk costs on the outcome of alternating-offers bargaining between inequity-averse agents


Ewerhart, Christian (2006). The effect of sunk costs on the outcome of alternating-offers bargaining between inequity-averse agents. Schmalenbach Business Review (sbr), 58:184-203.

Abstract

When investments are specific to a relationship and contracting possibilities are incomplete, the efficiency of a joint venture may be severely impaired by ex-post opportunistic and hold-up type behavior. How is the logic of this argument affected by inequity aversion? In this paper I show that incentives to invest are stronger with inequity aversion because a higher investment by an individual agent increases not only the total surplus to be divided, but also, generally, the relative share of the surplus obtained by this agent in the ex-post negotiation. In fact, when production is sufficiently profitable and agents are sufficiently patient, then first-best investment levels may be approximated without any contract.

Abstract

When investments are specific to a relationship and contracting possibilities are incomplete, the efficiency of a joint venture may be severely impaired by ex-post opportunistic and hold-up type behavior. How is the logic of this argument affected by inequity aversion? In this paper I show that incentives to invest are stronger with inequity aversion because a higher investment by an individual agent increases not only the total surplus to be divided, but also, generally, the relative share of the surplus obtained by this agent in the ex-post negotiation. In fact, when production is sufficiently profitable and agents are sufficiently patient, then first-best investment levels may be approximated without any contract.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:April 2006
Deposited On:30 Mar 2010 13:10
Last Modified:05 Apr 2016 13:31
Publisher:Schmalenbach-Gesellschaft für Betriebswirtschaft
ISSN:1439-2917
Official URL:http://www.fachverlag.de/sbr/pdfarchive/einzelne_pdf/sbr_2006_april-184-203.pdf

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