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Split it up to create incentives: Investment, public goods and crossing the river

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  • Martin, Simon
  • Schlag, Karl H.

Abstract

When should one pay the ferryman? When to pay for the delivery of a good, and how should one invest in a public good if there is a single transaction and institutions are costly? We show how to solve the hold-up problem. The idea is to appropriately split up the desired total contribution into several separate contributions that are made in sequence, with each party threatening to discontinue if others deviate. Our solution concept is based on subgame perfection, where players are either selfish and do not care about very small gains or are socially minded as long as there is no deviation.

Suggested Citation

  • Martin, Simon & Schlag, Karl H., 2020. "Split it up to create incentives: Investment, public goods and crossing the river," Journal of Economic Theory, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300867
    DOI: 10.1016/j.jet.2020.105092
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    More about this item

    Keywords

    Hold-up problem; ε-subgame perfect equilibrium; Finite horizon; Enforcement without contracts; Gradualism;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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