There are a number of models describing bargaining behavior and conflict resolution in the face of uncertain outcomes. This study will use laboratory experimental methods to evaluate the predictive capacity of two alternative models of bargaining in the context of an incomplete contract. In its most simple form, parties in the first stage of an incomplete contract first make some form of relationship-specific investment that enhances value or reduces costs in the second stage, when uncertainty is resolved. Once the state of the world is known, parties to the incomplete contract realize a surplus to be divided among participants. Bargaining divides surplus and completes the contract. The subgame perfect equilibrium bargaining hypothesis predicts that surplus divisions from bargaining are independent of sunk costs, i.e., in this case, relationship-specific investments. Alternatively, an equity-theoretic model predicts that bargaining will divide surplus proportionately with each party's share of total investment when individual investments are observable. When this information is not available, outcomes are equivalent to those predicted by the perfect equilibrium hypothesis. The predictive power of these alternative bargaining hypotheses will be tested by systematically varying bargainers' information on relationship-specific investments. Moreover, since investment incentives in contracts are determined by bargaining outcomes, and since the hypotheses to be tested imply different bargaining outcomes, this study will also contribute to our understanding of the linkage between bargaining behavior and contractual performance.
