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Investments and the holdup problem in a matching market

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  • Bester, Helmut

Abstract

This paper studies the properties of the steady state equilibrium in a bilateral matching market with ex ante investments at the market entry stage. Investment incentives depend on search frictions because both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem is more important for the long side of the market. In the extreme case of perfectly substitutable investments only the agents on the short side make investments. When market frictions become negligible, the market equilibrium approaches the Walrasian outcome.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 49 (2013)
Issue (Month): 4 ()
Pages: 302-311

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Handle: RePEc:eee:mateco:v:49:y:2013:i:4:p:302-311

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Holdup problem; Matching market; Investments;

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Cited by:
  1. Schmitz, Patrick W., 2009. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," CEPR Discussion Papers 7584, C.E.P.R. Discussion Papers.
  2. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.

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