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Unobservable Investment and the Hold-Up Problem

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  • Gul, Faruk

Abstract

We study a two-person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining. We show that if all offers are made by the seller and the time between offers is small, then the buyer invests efficiently and the seller extracts all of the surplus. Hence, bargaining with frequently repeated offers remedies the hold-up problem even when the agent who makes the relation-specific investment has no bargaining power and contracting is not possible. We consider alternative formulations with uncertain gains from trade or two-sided investment.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 69 (2001)
Issue (Month): 2 (March)
Pages: 343-76

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Handle: RePEc:ecm:emetrp:v:69:y:2001:i:2:p:343-76

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  1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  2. Ching-to Albert Ma, 1990. "Renegotiation and Optimality in Agency Contracts," Papers 0004, Boston University - Industry Studies Programme.
  3. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
  4. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  5. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
  6. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March.
  7. Hermalin, Benjamin E. & Katz, Michael L., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Department of Economics, Working Paper Series qt1678w3w9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Steven A. Matthews, 1993. "Renegotiation of Sales Contracts," Discussion Papers 1051, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
  11. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  12. Che, Y.K. & Chung, T.Y., 1995. "Incomplete Contracts and Cooperative Investments," Working papers 9524, Wisconsin Madison - Social Systems.
  13. Drew Fudenberg & David K. Levine & Jean Tirole, 1985. "Infinite-Horizon Models of Bargaining with One-Sided Incomplete Information," Levine's Working Paper Archive 1098, David K. Levine.
  14. Ma, Ching-to Albert, 1991. "Adverse Selection in Dynamic Moral Hazard," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 255-75, February.
  15. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
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