Group Identity and Relation-Specific Investment: An Experimental Investigation

Abstract

The hold-up problem has played a central role in the study of firm boundaries, which originated with the pathbreaking essay by Coase (1937). This paper studies a previously unexplored mechanism by which integration between two parties could resolve the hold-up problem. Based on Tajfel and Turner’s (1979) social identification theory, we conjecture that group identity increases the degree of altruism towards another group member, and this in turn helps resolve the hold-up problem. We test this conjecture in a laboratory experiment. Our subjects were randomly divided into two teams and asked to wear their team’s uniform. Task 1 required them to answer two questions about trivia. Prior to answering the questions, the subjects were given access to a chat program that enabled them to help their team members. For Task 2, the subjects played a standard hold-up game with either a member of their own team (representing integration) or with a member of the other team (non-integration). We find that team membership significantly increases the investment rate as well as the share of the surplus offered back to the investor, thus mitigating the hold-up problem.