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Testing, hold up and the dynamics of preferences

Author

Listed:
  • Gonzalo Olcina
  • Concepción Peñarrubia

Abstract

This paper presents an overlapping generations model with cultural transmission of preferences in an economy in which players face a hold up problem. One of the players, the firm, can use a testing technology which allows him to imperfectly monitor his partner's behaviour. This technology is completely useless with homogeneous preferences. We obtain that in the stable steady state of the economy there is a mixed distribution of preferences where both selfish and other-regarding preferences are present in the population. Moreover, with a good testing technology, the steady state is characterized by the first-best result in the investment decisions. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Gonzalo Olcina & Concepción Peñarrubia, 2005. "Testing, hold up and the dynamics of preferences," Spanish Economic Review, Springer;Spanish Economic Association, vol. 7(4), pages 267-288, December.
    • Handle: RePEc:spr:specre:v:7:y:2005:i:4:p:267-288
    DOI: 10.1007/s10108-005-0103-0
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