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A Simple Economic Teaching Experiment on the Hold-Up Problem

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  • Dieter Balkenborg
  • Todd Kaplan
  • Timothy Miller

Abstract

The hold-up problem is central to the theory of incomplete contracts. This can occur if, after making a sunk investment in a relationship, one party can be taken advantage of by the other party, leading to inefficient underinvestment. The authors describe a simple teaching experiment that illustrates the hold-up problem, and address how to integrate it into a class.

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File URL: http://hdl.handle.net/10.1080/00220485.2012.714310
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

Volume (Year): 43 (2012)
Issue (Month): 4 (October)
Pages: 377-385

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Handle: RePEc:taf:jeduce:v:43:y:2012:i:4:p:377-385

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  1. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  2. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
  3. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
  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. Harrison, Mark & Markevich, Andrei, 2007. "Quantity Versus Quality in the Soviet Market for Weapons," The Warwick Economics Research Paper Series (TWERPS) 822, University of Warwick, Department of Economics.
  7. Coase, R H, 2000. "The Acquisition of Fisher Body by General Motors," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 15-31, April.
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