We study experimentally whether employers or workers should invest in firm specific training. Only workers are assumed to have an alternative trading opportunity. Both the turnover costs case where this alternative takes the form of an outside option and the no-friction case where it serves as a...

Breach penalties can be used to protect specific investments and are therefore a remedy against holdup. Not all breach remedies are, however, equally efficient. Some common types are predicted to protect too well thereby inducing overinvestment. Theoretically overinvestment is driven by two...

We report results from an experiment based on a simplified version of Hart's (1995) property rights theory of the firm. Only one manager invests and this investment is completely specific. In that case the theory predicts that the level of investment is not affected by the level of no-trade...

According to the outside option principle the holdup problem can be lifted by structuring the post-investment bargaining stage in such a way that the non-investing party has a binding outside option. The investor then becomes residual claimant and has the appropriate incentives to invest. Theory...

Breach remedies serve an important role in protecting relationship-specific investments. Theory predicts that some common remedies protect too well and induce over investment, either though complete insurance against potential separation or the possibility that breach is prevented by increasing...

Incentive instruments like asset ownership and performance pay often have to strike a balance between the productive incentives and the rent-seeking incentives they provide. Standard theory predicts that a given instrument becomes less attractive when the effectiveness of rent-seeking activities...

"Standard theory predicts that holdup can be alleviated by making specific investments unobservable; private information creates an informational rent that boosts investment incentives. Empirical findings, however, indicate that holdup is attenuated by fairness and reciprocity motivations....

Standard economic theory identifies a trade-off between up-or-stay and up-or-out promotion rules. Up-or-stay never wastes the skills of those not promoted but may provide insufficient incentives to invest in skills. Up-or-out can always induce investment in skill acquisition but may waste the...