Hold up and Intergenerational transmission of Preferences

• Autores: Gonzalo Olcina Vauteren , Concepción Peñarrubia
• Localización: Abstracts of the Fifth Spanish Meeting on Game Theory and Applications / coord. por Jesús Mario Bilbao Arrese , Francisco Ramón Fernández García , 2002, ISBN 84-472-0733-1, pág. 118
• Idioma: inglés
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• Resumen

  • This paper focuses on the formation, evolution and stability of the distribution of preferences in the population and its relationship with the investment and bargaining strategies in a simplified hold up problem. More precisely, in our model a population of infinitely-lived players (say, for example, firms) with homogeneous selfish or self-regarding preferences is pair-wise matched at each period with a population of an equal size of short-lived players (say, for example, workers) with heterogeneous preferences. Both types of player play a two-stage game. In the first stage, they decide separately but simultaneously whether to make a general or a relation-specific investment. The latter type of investment is more efficient, that is, yields a higher surplus, but entails a higher individual cost. Moreover, both of the current investments also determine the bargaining power of the partners in the second stage of the game, when they negotiate the division of the surplus. If both players have made the same kind of investment they will have the same bargaining power, but if one has made a general investment while the other has made a specific investment, the former has all the bargaining power, although the surplus to be divided is smaller.

    Using this simplified game, we capture a stylized hold up situation. Players are afraid of making costly specific investment because if their partners make a general investment, they run the risk of being exploited.

    Preferences in the population of short-lived players are heterogeneous. In each period, there is a fraction of selfish players, but there is also a fraction of players motivated by reciprocal altruism. In particular, we use the concept of inequity aversion of Fehr and Schmidt (1999). More precisely, strongly inequity averse players behave very differently from selfish players in a negotiation.

    Namely, they reject very unfair offers when they are responders and they are generous when they are proposers. Any short-lived player lives for two periods in an overlapping generation situation. In the second period, as an adult, each one plays the investment game already described, but she also has a descendant and makes a costly decision on education effort, trying to transmit her own preferences.