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An Experimental Investigation of Moral Hazard in Costly Investments

Frequently, parties make sequential decisions regarding investments for which the probability of success or failure is dependent on the amount of total investment. This paper reports a series of experiments involving a costly investment game that is derived from the catalytic finance model of Morris...

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Published in:	Southern economic journal 2008-01, Vol.74 (3), p.725-746
Main Authors:	Deck, Cary A., Reyes, Javier
Format:	Article
Language:	English
Subjects:	Analysis Business losses Debt Debtors Decision making Econometrics Economic behaviour Economic reform Economics Finance Financial investments Investment Investment decisions Investment strategies Investments Investors Laboratories Management Moral hazard Opportunity costs Public infrastructure Return on investment Risk aversion Solvents Success Third party Ultimatum game
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container_title	Southern economic journal
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creator	Deck, Cary A. Reyes, Javier
description	Frequently, parties make sequential decisions regarding investments for which the probability of success or failure is dependent on the amount of total investment. This paper reports a series of experiments involving a costly investment game that is derived from the catalytic finance model of Morris and Shin (Global games: Theory and applications. In "Advances in Economics and Econometrics". "Proceedings of the Eighth World Congress of the Econometric Society", edited by M. Dewatripont, L. Hansen, and S. Turnovsky. Cambridge, MA: Cambridge University Press, pp. 56-114). The sequential nature of investments is such that the second investment could function as a complement to the initial investment or simply serve as a substitute to it, thereby creating moral hazard. The features of this game are similar to those of the ultimatum game. However, there are several key differences between the games that may account for the high frequency of materially self-interested behavior that we observe, particularly among second movers.
doi_str_mv	10.1002/j.2325-8012.2008.tb00861.x
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subjects	Analysis Business losses Debt Debtors Decision making Econometrics Economic behaviour Economic reform Economics Finance Financial investments Investment Investment decisions Investment strategies Investments Investors Laboratories Management Moral hazard Opportunity costs Public infrastructure Return on investment Risk aversion Solvents Success Third party Ultimatum game
title	An Experimental Investigation of Moral Hazard in Costly Investments
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