At-will relationships: How an option to walk away affects cooperation and efficiency

We theoretically and experimentally examine the e ects from adding a simple, empirically relevant action to a repeated partnership, the option to walk away. Manipulating both the value of the outside option, and its relative distribution among the partners, we examine the strategies selected by human subjects in a simple prisoners-dilemma-like partnership. Our ndings indicate that selecting between in-relationship punishments or walking-away are dictated by individual rationality. Moreover, where dissolution is used to punish bad outcomes, we nd subjects commonly use a compound punishment, with a forgiving probation phase before termination is used. Where outside options for ex-partners are asymmetric, we nd stark selection e ects, with the potential for very high and very low e ciency, depending on how the division is determined, motivating further research into dissolution clauses for relational contracting.