Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/230978 
Year of Publication: 
2020
Series/Report no.: 
Discussion Papers of the Max Planck Institute for Research on Collective Goods No. 2020/23
Publisher: 
Max Planck Institute for Research on Collective Goods, Bonn
Abstract: 
Oliver Williamson has coined the term "fundamental transformation". It captures the following situation: before they strike a deal, buyer and seller are protected by competition. Yet thereafter they find themselves in a bilateral monopoly. With common knowledge of standard preferences, both sides conclude the contract regardless if its expected value exceeds their outside options. We run an experiment to test whether additional behavioral reasons deter mutually beneficial trade. If the risk materializes, another individual makes a windfall profit. She does so by intentionally exploiting the first individual. The first individual is let down, although she has knowingly exposed herself to this risk. Participants sell the opportunity to enter the contractual relationship at a price below its expected value. This effect is driven by risk aversion, and already present if the risk is stochastic. Behavioral effects are heterogeneous. About a quarter of participants exhibit the hypothesized additional deterrent effect.
Subjects: 
fundamental transformation
bilateral monopoly
sunk cost
Oliver Williamson
windfall profit
exploitation
let down aversion
JEL: 
B21
C91
D22
D43
K12
L12
L14
Document Type: 
Working Paper

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