Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation

Abstract

We contribute to the theory of the firm by experimentally investigating a bilateral trade relationship in which standard theory assuming self-regarding preferences predicts that the seller will be better off by investing in the outside option to improve his bargaining position. The seller’s investment, however, might negatively affect the buyer’s other-regarding preferences if the investment is viewed as opportunistic. We find overall support for our hypotheses that arise from the link between other-regarding behavior and opportunism. In our experiment the seller can become worse off by investing, suggesting that costly solutions to opportunistic behavior such as vertical integration may be unnecessary.