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Does Group Identity Prevent Inefficient Investment in Outside Options? An Experimental Investigation

ISBN: 978-1-78560-964-0, eISBN: 978-1-78560-963-3

Publication date: 18 December 2016

Abstract

We study whether group identity mitigates inefficiencies associated with appropriable quasi-rents, which are often created by relationship-specific investments in bilateral trade relationships. We conjecture that group identity strengthens the effect of an agent’s generous action in increasing his trade partner’s altruistic preferences, and this effect helps reduce incentives to undertake ex-post inefficient opportunistic behavior such as investment in an outside option. Our experimental results, however, do not support this conjecture, and contrast with our previous experimental findings that group identity mitigates distortions in ex-ante efficient relation-specific investment. We discuss a possible cause of the difference and its implications for the theory of the firm.

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Acknowledgements

Acknowledgments

We are particularly grateful to Daniel Woods and Annie Hsiao for excellent research assistance and to Editors Sebastian J. Goerg and John R. Hamman as well as to Robert Gibbons, Richard Holden, Mike Waldman, and an anonymous referee for helpful comments and suggestions. Hodaka Morita gratefully acknowledges financial support from the UNSW Business School and the Australian Research Council and Maroš Servátka from the College of Business and Economics, University of Canterbury and Macquarie Graduate School of Management.

Citation

Morita, H. and Servátka, M. (2016), "Does Group Identity Prevent Inefficient Investment in Outside Options? An Experimental Investigation", Experiments in Organizational Economics (Research in Experimental Economics, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 105-126. https://doi.org/10.1108/S0193-230620160000019010

Publisher

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Emerald Group Publishing Limited