Is There a Hold-up Problem?

Tore Ellingsen and Magnus Johannesson

No 357, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: Most literature on the hold-up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs. We argue that this approach is unsatisfactory. If the bargaining procedure is relatively symmetric, it typically admits multiple perfect equilibria, some of which give the investor a high enough payoff to sustain efficient investment. Even if the bargaining procedure is asymmetric and rigged against the investor, there may be investment if agents are driven by moral concerns or if communication creates commitment. Laboratory experiments indicate that communication is necessary and sufficient for agents to coordinate on efficient outcomes when the bargaining game is symmetric. When the bargaining game is rigged against the investor, the hold-up problem is mitigated, but not eliminated, by moral behavior. Communication is quite credible, and we find that promises are more believable that threats.

Keywords: Specific investments; bargaining; fairness; communication (search for similar items in EconPapers)
JEL-codes: C78 L14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2000-02-17
New Economics Papers: this item is included in nep-exp, nep-ind and nep-mic
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Is There a Hold‐up Problem? (2004)
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