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Hold-up and Sequential Specific Investments

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  • Vladimir Smirnov

    ()
    (University of Sydney)

  • Andrew Wait

    ()
    (University of Sydney)

Abstract

We explore the hold-up problem when parties can make investments simultaneously or sequentially. Sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. However, a cost of sequencing is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can prevent trade from occurring; this can be interpreted as a new form of hold-up. If both parties prefer to invest second, as the number of potential investment periods is increased, the subgame-perfect equilibrium can switch between a prisoners' dilemma and a coordination game.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 2 (Summer)
Pages: 386-400

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Handle: RePEc:rje:randje:v:35:y:2004:2:p:386-400

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  1. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  2. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  3. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  4. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
  5. 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.
  6. 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.
  7. Neher, Darwin V, 1999. "Staged Financing: An Agency Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 255-74, April.
  8. De Fraja, Gianni, 1999. "After You Sir. Hold-Up, Direct Externalities, and Sequential Investment," Games and Economic Behavior, Elsevier, vol. 26(1), pages 22-39, January.
  9. Admati, Anat R & Perry, Motty, 1991. "Joint Projects without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 259-76, April.
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Cited by:
  1. 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.
  2. AGRELL, Per & KASPERZEC, Roman, 2010. "Dynamic joint investments in supply chains under information asymmetry," CORE Discussion Papers 2010085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Chen, Bin R. & Chiu, Y. Stephen, 2010. "Public-private partnerships: Task interdependence and contractibility," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 591-603, November.
  4. Thomas Ehrmann & Karl-Hans Hartwig & Torsten Marner & Hendrik Schmale, 2009. "Specific Investments and Ownership Structures in Railways – An Experimental Analysis," Working Papers 12, Institute of Transport Economics, University of Muenster.
  5. 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.

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