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Faravelli, Marco; Kirchkamp, Oliver and Rainer, Helmut (2013): The effect of power imbalances on incentives to make non-contractible investments. In: European Economic Review, Vol. 61: pp. 169-185

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We use an experiment to study the effect of ex-post sharing rules on relationship-specific investments in an incomplete contracting context. We find that no power structure can induce first-best investments and that equally productive partners reach more efficient outcomes with a balanced power structure (i.e., equal sharing of returns) than with an asymmetric one. In addition, we find evidence for behavioural effects: partners make higher investments and reach higher efficiency levels than own-payoff maximisation would suggest. This behaviour is in line with a model where decision-makers care about social efficiency. It is not consistent with inequity-averse preferences.

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