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Timing of investments, holdup and total welfare

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  • Smirnov, Vladimir
  • Wait, Andrew

Abstract

We explore hold-up when trading parties can make specific investments simultaneously or sequentially. With simultaneous investment both investors are held-up. With sequential investment contracting becomes possible after the project has commenced, so the second investor avoids being held-up. If the two investments are independent three effects are identified when comparing the total welfare of the two regimes: sequential investment increases the costs of delay; sequential investment reduces the incentive for the first player to invest; and the sequential regime increases the second player’s incentive to invest. Given this, the (second-best) optimal regime will favour the more important investment. Similarly, if the choice of investment level of an investor is inelastic to the regime adopted, the timing regime adopted should maximise the incentive for the other party to invest. The paper also shows the timing of investment can act as an additional form of hold-up; if they have the option when to invest, a party may choose the regime that does not maximise total welfare.
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  • Smirnov, Vladimir & Wait, Andrew, 2004. "Timing of investments, holdup and total welfare," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 413-425, March.
    • Handle: RePEc:eee:indorg:v:22:y:2004:i:3:p:413-425
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    Cited by:

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    2. Christa Hainz, 2007. "Business Groups in Emerging Markets: Financial Control and Sequential Investments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 336-355, June.
    3. Patrick W Schmitz, 2022. "How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2563-2577.
    4. Vladimir Smirnov & Andrew Wait, 2004. "Hold-up and Sequential Specific Investments," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 386-400, Summer.
    5. Ngo Van Long & Antoine Soubeyran & Raphael Soubeyran, 2014. "Knowledge Accumulation Within An Organization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(4), pages 1089-1128, November.
    6. Maxim Mai & Vladimir Smirnov & Andrew Wait, 2014. "Ownership, Access, and Sequential Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 47(1), pages 203-231, February.
    7. Дзагурова Наталия Борисовна, 2016. "Направления Повышения Привлекательности Лотерей, Сопряженных С Осуществлением Кооперативных Специфических Инвестиций," Journal of Institutional Studies Journal of Institutional Studies (Журнал институциональных исследований), CyberLeninka;Общество с ограниченной ответственностью «Гуманитарные перспективы», vol. 8(4), pages 53-71.
    8. Swinnen, Johan F.M. & Vercammen, James, 2006. "Uncertainty and Specific Investment with Weak Contract Enforcement," 2006 Annual meeting, July 23-26, Long Beach, CA 21044, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Smirnov, Vladimir & Wait, Andrew, 2004. "Timing of investments, holdup and total welfare," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 413-425, March.
    10. Ming-Chung Chang & Jin-Li Hu, 2009. "Inconsistent preferences in environmental protection investment and the central government's optimal policy," Applied Economics, Taylor & Francis Journals, vol. 43(6), pages 767-772.
    11. Дзагурова Наталия Борисовна & Невидомская Мария Александровна, 2015. "«Запаздывание» Специфических Инвестиций Как Временной Аналог Недоинвестирования," Journal of Institutional Studies Journal of Institutional Studies (Журнал институциональных исследований), CyberLeninka;Общество с ограниченной ответственностью «Гуманитарные перспективы», vol. 7(3), pages 76-91.
    12. AGRELL, Per & KASPERZEC, Roman, 2010. "Dynamic joint investments in supply chains under information asymmetry," LIDAM Discussion Papers CORE 2010085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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