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Revenue sharing agreements and hold-up problems in joint projects: Theory and experiments

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  • Zhang, Sookie Xue
  • Bayer, Ralph-Christopher

Abstract

The lack of property rights in joint projects can cause hold-up problems, as expected fights over the proceeds make investing not worthwhile. We investigate theoretically and experimentally if the availability of different contractual sharing rules can solve the hold-up problem. As theory predicts, we find that the availability of first-best contracts that divide revenue proportional to investment shares yields high uptake, extensive investment and high efficiency. First-best sharing contracts are often not feasible. Simple equal-split contracts are a prominent but theoretically ineffective alternative. Contrary to theoretical predictions, making cheap equal-split contracts available is welfare increasing. Cooperative participants opt for the contract with the correct expectation that despite the lack of incentives significant investment will follow. This leads to welfare gains. The better than expected performance of equal-split contracts provides a rationale for their frequent use in the field.

Suggested Citation

  • Zhang, Sookie Xue & Bayer, Ralph-Christopher, 2024. "Revenue sharing agreements and hold-up problems in joint projects: Theory and experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 228(C).
    • Handle: RePEc:eee:jeborg:v:228:y:2024:i:c:s0167268124003883
    DOI: 10.1016/j.jebo.2024.106774
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    More about this item

    Keywords

    Contractual sharing rules; Distributive conflicts; Cooperation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions

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