Introduction The experiment Results

Fear of being left alone drives inefficient exitfrom partnerships

Theory and Experimental Evidence

Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#DFG RTG 1411, Friedrich-Schiller-Universitt, JenaUMR GAEL INRA, Universit Pierre Mends France, Grenoble

#DICE, Heinrich-Heine-Universitt, Dsseldorf

July 201415th Conference of the International Schumpeter Society

Jena, GermanyFear of being left alone drives inefficient exit from partnerships 1 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The co-author dilemma

You have a paper with a co-author

Publication depends stochastically on quality (no certainty ofacceptance!)Quality depends on effort by you and co-authorImperfect monitoring: you cannot really track your co-authorseffortBoth you and your co-author benefit from publicationOutside options: Both you and your co-author have otherpapers to work on

Fear of being left alone drives inefficient exit from partnerships 2 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The co-author dilemma (2)

Does having outside options make collaboration moresuccessful?

How do exit options affect cooperation within the commonproject?How stable are partnerships when individuals have outsideoption?What makes people leave a partnership?

Fear of being left alone drives inefficient exit from partnerships 3 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The Partnership Game vs the Public Good Game(1)

The Public Good GameOutcome is deterministicObservability of the action of othersNo option to leave collective projectFocus on Free Riding

Fear of being left alone drives inefficient exit from partnerships 4 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The Partnership Game vs the Public Good Game(2)

The Partnership GameOutcome is stochasticAction of others are not observableOption to leave collective projectFocus on why partners decide to stop working together

Fear of being left alone drives inefficient exit from partnerships 5 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Literature

Yamagishi, T. (1988). Exit from the group as an individualisticsolution to the free rider problem in the United States and Japan.Taylor, M. P. (1996). Earnings, independence or unemployment:Why become self-employed?Keser, C. and C. Montmarquette (2011). Voluntary versusenforced team effort.Semykina, A. and J. M. Wooldridge (2013). Estimation ofdynamic panel data models with sample selection.

Fear of being left alone drives inefficient exit from partnerships 6 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The model

Agent i paired with j ;

Decides on how much effort ei to devote to a joint project;Project successful with probability pi(ei , ej), pi() concaveProject yields payoff vi if successful; 0 otherwiseProject yields pi(ei , ej) vi ei

Alternative individual project yields pi(ei + x) vk eiWe vary x across treatment.We also vary whether vi = vj or vi 6= vj .

Fear of being left alone drives inefficient exit from partnerships 7 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

The decision to exit

Individual ought to exit if d ej eej x exit costs

< 0 :

the partner is expected to exit (d ej low) and/orthe partner is expected to exert low effort and/orthe outside option is very profitable

Fear of being left alone drives inefficient exit from partnerships 8 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Between-period timeline

Figure: An example of a between-period timeline

Fear of being left alone drives inefficient exit from partnerships 9 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Within-period timeline

Figure: Timeline of a period in the experiment

Fear of being left alone drives inefficient exit from partnerships 10 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Main findings

1 Higher profitability of individual outside projects lowers overallwelfare

1 does not affect levels cooperation within the common project2 lowers the number of periods with common projects

2 Individuals exit too often1 Beliefs about others effort level are correct2 Beliefs about others likelihood to exit are too pessimistic3 Even given those pessimistic beliefs, people exit too often

Fear of being left alone drives inefficient exit from partnerships 11 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Instability of joint projects

Treatment 1Pe

riods

Treatment 2

20 16 24

Treatment 3

Values

Perio

ds

20 16 24

Treatment 4

Valuescircle = both in, square = left alonetriangle = leave alone, cross = both out

Figure: Project choice by individuals over time, by treatmentFear of being left alone drives inefficient exit from partnerships 12 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Pessimistic beliefs

Table: Statistics upon exit, by treatment.

Treatment 1 2 3 4

Number of exits 15 57 60 61eejt before exit 5.0 5.3 5.6 5.9e jt before exit 4.9 5.0 4.7+ 5.4dejt at exit 80.4% 69.5% 62.7% 54.8%djt at exit 100.0% 89.5% 83.3% 83.6%

Difference w.r.t. beliefs: + p < 0.10 , p < 0.05 , p < 0.01 , p < 0.001

Fear of being left alone drives inefficient exit from partnerships 13 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Drivers of exit: exit costs

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-5 0 5 10 -5 0 5 10

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Figure: Exit frequency as a function of expected exit costs, by treatments.Fear of being left alone drives inefficient exit from partnerships 14 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Drivers of exit: Past failure in joint project

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Figure: Exit frequency following successes and failures, by treatments.Fear of being left alone drives inefficient exit from partnerships 15 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Drivers of exit: Econometric analysis

Regression of exit decision on exit costs and past failure

Both make exit more likelyHowever exit costs increasingly drive exit as individual projectsbecome more profitable (across treatments)Difference between effort and others expected effort also matter

Lower exit costs I individuals make more cost-benefitcomparisons, rely less on exit as punishment

Fear of being left alone drives inefficient exit from partnerships 16 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

Introduction The experiment Results

Conclusion

Higher profitability of outside options are detrimental to socialwelfare because:

Higher exit options do not encourage effort within the publicprojectSubjects over-invest in their private projectsSubjects are too afraid their partner will leave

Higher profitability of outside optionsMakes individuals focus more on cost-benefit considerationsBut those are based on incorrect beliefs

Subjects also punish failure in excess of the effect of failure onbeliefs

This is inefficient as exit does not increase cooperation uponreturn

Fear of being left alone drives inefficient exit from partnerships 17 / 17Alexia Gaudeul, Paolo Crosetto, and Gerhard Riener#

IntroductionThe experimentResults