Fairness considerations in joint venture formation

• Published in: Experimental economics : a journal of the Economic Science Association Vol. 23; no. 3; pp. 632 - 667
• Main Authors: Hossain, Tanjim, Lyons, Elizabeth, Siow, Aloysius
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.09.2020; Springer Nature B.V
• Subjects: Bargaining; Behavioral/Experimental Economics; Cognition; Decision making; Economic structure; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Employees; Employment; Experiments; Game Theory; Joint ventures; Laboratories; Microeconomics; Motivation; Operations Research/Decision Theory; Original Paper; Partnerships; Profitability; Profits; Rationality; Social and Behav. Sciences; Wages & salaries; Welfare; Firm formation; Organizational structure; Fairness concerns; C92; D91; Cooperative bargaining; L14; D83
• ISSN: 1386-4157; 1573-6938
• DOI: 10.1007/s10683-019-09626-x

Using a series of laboratory experiments in the context of bilateral bargaining over whether and how to engage in a joint venture, this paper shows that fairness concerns result in failures to undertake profitable joint production opportunities. We find that framing an opportunity as an employment relationship rather than as a partnership significantly reduces these inefficiencies and increases subjects’ welfare. Consistent with the theoretical model developed in the paper, text analysis and a follow-up experiment demonstrate that the lower likelihood of an efficient outcome in the partnership frame is driven primarily by a concern for fairness generated by the perceived social relationship associated with partnerships, and not by differences in the economic structure, cognition, subject motivation, or changes in relative bargaining power.