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Bounded Rationality as an Essential Component of the Holdup Problem

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Abstract

We provide experimental evidence for the hypothesis that bounded rationality is an important element of the theory of the firm. We implement a simplified version of a mechanism designed to perfectly solve the holdup problem under conditions of perfect rationality (Maskin 2002). We test whether this mechanism is able to perfectly solve our experimental holdup problem or may at least improve economic performance. We find that this is not the case: the implementation of the mechanism worsens economic performance. We reconstruct the main features of participants’ behavior by applying the logit agent quantal response equilibrium (McKelvey and Palfrey 1998) as an equilibrium concept that takes players’ potential mistakes into account.

Suggested Citation

  • Mathias Erlei & Wiebke Roß, 2013. "Bounded Rationality as an Essential Component of the Holdup Problem," TUC Working Papers in Economics 0009, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).
    • Handle: RePEc:tuc:tucewp:0009
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    Cited by:

    1. Schmitz, Patrick W. & Kusterer, David J., 2018. "Government versus Private Ownership of Public Goods: Experimental Evidence," CEPR Discussion Papers 13204, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Bounded rationality; transaction costs; incomplete contracts; experiment; mechanism design;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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