- Does making specific investments unobservable boost investment incentives?
- Amsterdam: University of Amsterdam
- Scholar Working Paper Series
- Volume | Edition (Serie)
- WP 37/02
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Economic theory predicts that holdup may be alleviated by making the specific investment unobservable to the non-investor; private information creates an informational rent that boosts investment incentives. Experimental findings, however, indicate that holdup is attenuated by positive reciprocity. Private information may interfere with this, for instance when it becomes impossible to directly observe whether the investor behaved 'kindly' or not. In that way unobservability could weaken the reciprocity mechanism. This paper reports about an experiment to investigate this issue empirically. Our results are in line with standard theoretical predictions when there is limited scope for reciprocity. But with suffcient scope for reciprocity, unobservability does not boost specific investments.
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