Sense of Unity and the Hold-up Problem: A Behavioral Study of Firm Boundaries
The hold-up problem has played a central role in the study of firm boundaries that originated with
the pathbreaking essay by Coase (1937). This paper studies a previously unexplored mechanism
through which vertical integration could resolve the hold-up problem. Based on Tajfel and
Turner’s (1979) social identification theory, we hypothesize that team membership increases the
degree of altruism towards another team member, and this in turn helps resolving the hold-up
problem. We experimentally test this hypothesis. Prior to playing a standard hold-up game,
subjects are randomly divided into two teams and given their respective team uniforms to wear.
The experiment places subjects in two settings: in one condition they play the game with a
member of their own team and in the other condition they play the game with a member of the
other team. We investigate whether or not sense of unity created by team membership helps
resolving the hold-up problem in our experimental setup.