CRIEFF Discussion Paper Number 0902
Social welfare versus inequality aversion
in an incomplete contract experiment
Marco
Faravelli, Oliver Kirchkamp, Helmut Rainer
Abstract
We present the first laboratory study showing that
concerns for social welfare are key determinants of investment behavior in a
world of incomplete contracting. Two equally productive players simultaneously decide
how much to invest into a joint production process. The total monetary benefit
from joint production is split according to a sharing rule which may be
symmetric or asymmetric. Standard equilibrium predictions imply inefficiently
low investments and unequal payoff distributions. We show that concerns for
social welfare and inequality aversion call for opposite investment choices. In
the experiment, participants reveal a concern for social welfare but appear not
to care about inequality. As a consequence, observed investments are larger
than equilibrium investments in a selfish world. Surprisingly, even materially
disadvantaged players care more for social welfare than for equality. Social
welfare therefore increases but so does inequality. We also study conditions
under which players give up an advantageous sharing rule.
Power-sharing can be successful in the experiment, even when it is not in a
selfish world.
JEL Classifications: C91, D23, D86.
Keywords:
Experiments, Incomplete Contracts, Relationship-Specific Investment, Allocation
of Power, Social Preferences.
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