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Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation

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Abstract
We contribute to the theory of the firm by experimentally investigating a bilateral trade relationship in which standard theory assuming self-regarding preferences predicts that the seller will be better off by investing in the outside option to improve his bargaining position. The seller’s investment, however, might negatively affect the buyer’s other-regarding preferences if the investment is viewed as opportunistic. We find overall support for our hypotheses that arise from the link between other-regarding behavior and opportunism. In our experiment the seller can become worse off by investing, suggesting that costly solutions to opportunistic behavior such as vertical integration may be unnecessary.

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  • Hodaka Morita & Maroš Servátka, 2014. "Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation," Working Papers in Economics 14/31, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:14/31
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    3. Hodaka Morita & Maroš Servátka, 2016. "Does Group Identity Prevent Inefficient Investment in Outside Options? An Experimental Investigation," Research in Experimental Economics, in: Experiments in Organizational Economics, volume 19, pages 105-126, Emerald Group Publishing Limited.
    4. Gross, Till & Servátka, Maroš & Vadovič, Radovan, 2019. "Sequential vs. Simultaneous Trust," MPRA Paper 96343, University Library of Munich, Germany.

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    More about this item

    Keywords

    altruism; experiment; relationship-specific investment; opportunistic behavior; other-regarding preferences; outside option; theory of the firm;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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