Investing to Cooperate: Theory and Experiment

Jean-Pierre Benoît (1) , Roberto Galbiati (2) , Emeric Henry (2, 3)

1 London Business School
2 ECON - Département d'économie (Sciences Po)
3 CEPR - Center for Economic Policy Research

We study theoretically and in a lab-experiment how legal protection affects the level and type of investments in a setting where a player chooses an investment level before interacting repeatedly with the same set of agents. The investment stochastically affects the payoffs of the game in every subsequent period. We show that without legal protection: investments will be made since repeated interactions can serve as a substitute for legal enforcement; investments with less volatile returns are more likely; the investor might be forced to invest more to keep other players cooperative. Experimental results are broadly consistent with the theoretical findings.

Keywords: Investment; Experiments; Repeated Games; Property Rights

Domains: Economics and Finance

Jean-Pierre Benoît, Roberto Galbiati, Emeric Henry. Investing to Cooperate: Theory and Experiment. 2014. ⟨hal-03460477⟩