Does Group Identity Prevent Inefficient Investment in Outside Options? An Experimental Investigation

We study whether group identity helps mitigate inefficiencies associated with appropriable quasi-rents, which are often created by relationship-specific investments in bilateral trade relationships. Based on previous findings that group identity strengthens other-regarding preferences, we conjecture that group identity reduces agents’ incentives to undertake ex-post opportunistic behavior such as investment in an outside option. Our experimental results, however, do not support this conjecture, and contrast with our previous experimental findings that group identity mitigates the hold-up problem associated with distortion in relation-specific investment. We discuss a possible cause of the difference, and its implications for the theory of the firm.