Social welfare versus inequality aversion in an incomplete contract experiment
We present the first laboratory study showing that concerns for social welfare are key determinants of investment behavior in a world of incomplete contracting. Two equally productive players simultaneously decide how much to invest into a joint production process. The total monetary benefit from joint production is split according to a sharing rule which may be symmetric or asymmetric. Standard equilibrium predictions imply inefficiently low investments and unequal payoff distributions. We show that concerns for social welfare and inequality aversion call for opposite investment choices. In the experiment, participants reveal a concern for social welfare but appear not to care about inequality. As a consequence, observed investments are larger than equilibrium investments in a selfish world. Surprisingly, even materially disadvantaged players care more for social welfare than for equality. Social welfare therefore increases but so does inequality. We also study conditions under which players give an advantageous sharing rule. Power-sharing can be successful in the experiment, even when it is not in a selfish world.
We explore experimentally how power asymmetries between partners affect relationship-specific investments. We find that on average playersâ€™ investments are larger than equilibrium investments. In contrast to social dilemma experiments, in our experiment preferences for social welfare and those for equality call for different actions. Surprisingly, even disadvantaged players care more for social welfare and less for equality. As a result social welfare increases but so does inequality. We then study conditions under which power-advantaged players give up power. Power-sharing can be successful in the experiment, even when it is not in a selfish world.
Experiments, Incomplete Contracts, Relationship-Specific Investment, Allocation of Power, Social Preferences
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