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Leveraging social relationships and transparency in the insider game

Published online by Cambridge University Press:  01 January 2025

Gary Bolton ,
Axel Ockenfels  and
Peter Werner
Gary Bolton*
Affiliation:
Jindal School of Management, University of Texas at Dallas, 800 West Campbell Road, 75080 Richardson, TX, USA
Axel Ockenfels*
Affiliation:
Department of Economics, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany
Peter Werner*
Affiliation:
Department of Economics, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands
*
e-mail: [email protected]
[email protected]
[email protected]
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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.

Keywords

TransparencyRent extractionSocial tiesReciprocity

JEL classification

D63: Equity, Justice, Inequality, and Other Normative Criteria and Measurement C92: Laboratory, Group Behavior
Type
Original Paper
Information
Journal of the Economic Science Association , Volume 2 , Issue 2 , November 2016 , pp. 127 - 143
Copyright
Copyright © Economic Science Association 2016

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Footnotes

Electronic supplementary material The online version of this article (doi:10.1007/s40881-016-0030-x) contains supplementary material, which is available to authorized users.

This paper replaces an older version with the title “How managerial wage transparency may reduce shareholder returns—Evidence from an experiment”.

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