Opportunistic behavior involving specific investments in negotiations: a study with experimental methodology

Abstract

In the related literature, opportunistic behavior in contractual relations that require specific investments, commonly referred to as 'hold-up', partly accounts for the existence of vertically integrated firms. However, many authors posit that this behavior can be deterred through contractual terms, desire to build a reputation or intention to reward previous attitudes. The occurrence of opportunism is controversial, even in the famous contractual relation between General Motors and Fisher Body, considered by some as a canonical example of hold-up. This is a paramount issue because, if hold-up can indeed be avoided, literature must find new, alternative theories for the existence of vertically-integrated firms. Aimed at a deeper understanding of this issue, an experiment was carried out in which pairs of purchasers and sellers meet in negotiations. The roles ascribed to the participants allowed them to engage in hold-up with each other, and opportunistic behavior could also be concealed by informational asymmetries. Results were heterogeneous, not allowing a single clear answer regarding the occurrence of hold-up. Most participants acted opportunistically, but not so as to totally expropriate the quasi rents of their counterparts. Unexpectedly, the hold-up problem was proven more frequent in the pairs where people already knew each other.