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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.

Suggested Citation

  • Bester, Helmut, 2013. "Investments and the holdup problem in a matching market," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 302-311.
  • Handle: RePEc:eee:mateco:v:49:y:2013:i:4:p:302-311
    DOI: 10.1016/j.jmateco.2013.04.008
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    Cited by:

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    2. Elliott, M. & Talamàs, E., 2020. "Bargaining Foundations for Price Taking in Matching Markets," Cambridge Working Papers in Economics 2070, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Holdup problem; Matching market; Investments;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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