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Information and the Hold-Up Problem

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  • Hermalin, Benjamin E.
  • Katz, Michael L

Abstract

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting old-up problem is affected by the seller’s information about the investing party’s likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. We establish conditions under which the seller’s ability to observe the buyer’s investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.

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Bibliographic Info

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt782315gb.

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Date of creation: 30 Mar 2009
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Handle: RePEc:cdl:econwp:qt782315gb

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  1. Joel S. Demski & David E.M. Sappington, 1991. "Resolving Double Moral Hazard Problems with Buyout Agreements," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 232-240, Summer.
  2. Haucap, Justus & Wey, Christian, 2003. "Unionisation Structures and Innovation Incentives," Working Paper 21/2003, Helmut Schmidt University, Hamburg.
  3. Schmitz, Patrick W., 2008. "Incomplete contracts, the hold-up problem, and asymmetric information," Economics Letters, Elsevier, vol. 99(1), pages 119-122, April.
  4. Jean Tirole, 1985. "Procurement and Renegotiation," Working papers 362, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Farrell, Joseph & Gallini, Nancy T., 1987. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt4zr9b9dr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. 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.
  7. Stephanie Lau, 2008. "Information and bargaining in the hold-up problem," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 266-282.
  8. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
  9. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
  10. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
  11. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  12. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  13. Klein, Benjamin, 1988. "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 199-213, Spring.
  14. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-53, December.
  15. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  16. Hemphill, C. Scott, 2008. "Network Neutrality and the False Promise of Zero-Price Regulation," Working paper 560, Regulation2point0.
  17. Rogerson, William P, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 777-93, October.
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Cited by:
  1. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, 09.
  2. Katz, Michael L., 2013. "Provider competition and healthcare quality: More bang for the buck?," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 612-625.
  3. Bruno Jullien & Wilfried Sand-Zantman, 2014. "Pricing Internet Traffic: Exclusion, Signalling and Screening," CESifo Working Paper Series 4709, CESifo Group Munich.

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