Leveraging Social Relationships and Transparency in the Insider Game

Gary Bolton*, Axel Ockenfels, Peter Werner

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

We exhibit a mechanism by which two parties leverage their social relationship to ratchet up the rents they collect from a third party residual claimant. Specifically, in a laboratory environment, we study a novel three-person insider game in which 'insiders' decide how to distribute profits among themselves and an 'outsider' who is the residual claimant. We find that the distribution of payments is largely determined by an informal quid pro quo among the two decision makers at the expense of the outsider. We then manipulate pay transparency and the competition to keep interaction partners, thereby improving the strategic position of one insider. Pay transparency increases the profit share that goes to rent seekers. In addition, rent extraction from the third party persists when competition for interaction partners is introduced. As a result, we find that payments both affect and reflect the influence of social relationships.

Original languageEnglish
Pages (from-to)127-143
Number of pages17
JournalJournal of the Economic Science Association
Volume2
Issue number2
DOIs
Publication statusPublished - Nov 2016

Keywords

  • Transparency
  • Rent extraction
  • Social ties
  • Reciprocity

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