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

We study whether group identity mitigates inefficiencies associated with appropriable quasi-rents, which are often created by relationship-specific investments in bilateral trade relationships. We conjecture that group identity strengthens the effect of an agent’s generous action in increasing his trade partner’s altruistic preferences, and this effect helps reduce incentives to undertake ex-post inefficient 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 distortions in ex-ante efficient relation-specific investment. We discuss a possible cause of the difference and its implications for the theory of the firm.