Does the Fundamental Transformation Deter Trade? An Experiment

Abstract

Abstract Oliver Williamson has coined the term “fundamental transformation.” It captures the following situation: before they strike a deal, buyers and sellers are protected by competition. Yet, thereafter, they find themselves in a bilateral monopoly. With common knowledge of standard preferences, both sides would conclude the contract regardless if its expected value exceeds their outside options. We run an experiment to test whether additional behavioral concerns deter mutually beneficial trade. We test four concerns: If the risk materializes, another individual makes a windfall profit; she does so by intentionally exploiting another individual; the exploited individual may be her assigned partner; the individual that is let down is her contractual partner, and hence has voluntarily exposed herself to this risk. Behavioral effects are heterogeneous. About a quarter of participants from a standard student subject pool exhibit the hypothesized additional deterrent effect. This fraction is bigger than a third if participants interact with a random partner from somewhere in the world.