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Does Competition Solve the Hold-up Problem?

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Author Info
Leonardo Felli
Kevin Roberts

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Abstract

In an environment in which both buyers and sellers can undertake match specific investments, the presence of market competition for matches may solve hold-up and coordination problems generated by the absence of complete contingent contracts. In particular, this paper shows that when matching is assortative and sellers' investments precede market competition then investments are constrained efficient. One equilibrium is efficient with efficient matches but also there can be equilibria with coordination failures. Different types of efficiency arise when buyers undertake investment before market competition. These inefficiencies lead to buyers' under-investment due to a hold-up problem but, when competition is at its peak, there is a unique equilibrium of the competition game with efficient matches - no coordination failures - and the aggregate hold-up inefficiency is small in a well defined sense, independent of market size.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number 414.

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Date of creation: May 2001
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Handle: RePEc:cep:stitep:414

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Related research
Keywords: Competition; hold-up problem; matching; specific investments.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nobuhiro Kiyotaki & Ricardo Lagos, 2006. "A model of job and worker flows," Staff Report 358, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. de Meza, David & Lockwood, Ben, 2004. "Too Much Investment : A Problem Of Coordination Failure," The Warwick Economics Research Paper Series (TWERPS) 703, University of Warwick, Department of Economics. [Downloadable!]
  3. Pierre-André Chiappori & Murat Iyigun & Yoram Weiss, 2006. "Investment in Schooling and the Marriage Market," IZA Discussion Papers 2454, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. George J. Mailath & Volker Nocke & Andrew Postlewaite, 2002. "Business Strategy, Human Capital, and Managerial Incentives," PIER Working Paper Archive 03-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 23 Jun 2003. [Downloadable!]
    Other versions:
  5. Jansen, Marcel, 2004. "Can Job Competition Prevent Hold-Ups?," IZA Discussion Papers 988, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Peters, Michael, 2006. "Truncated Hedonic Equilibrium," Micro Theory Working Papers peters-06-04-11-02-42-39, Microeconomics.ca Website, revised 03 Mar 2009. [Downloadable!]
  7. Professor Yong Kim & Univ. Southern California, 2004. "Asset ownership and Asset Values Over Project Lifecycles," Econometric Society 2004 Far Eastern Meetings 604, Econometric Society. [Downloadable!]
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    Other versions:
  10. Roman Inderst & Christian Wey, 2005. "Buyer Power and Supplier Incentives," Discussion Papers of DIW Berlin 464, DIW Berlin, German Institute for Economic Research. [Downloadable!]
    Other versions:
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    Other versions:
  12. Yeon-Koo Che & Jozsef Sakovics, 2006. "The Hold-up Problem," ESE Discussion Papers 142, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  13. Peters, Michael, 2004. "Innis Lecture: Hedonic Equilibrium," Micro Theory Working Papers peters-04-07-30-12-06-27, Microeconomics.ca Website, revised 08 Apr 2008. [Downloadable!]
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    Other versions:
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    Other versions:
  18. Roman Inderst & Christian Wey, 2000. "Market Structure, Bargaining, and Technology Choice," CIG Working Papers FS IV 00-12, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  19. Prüfer, J., 2009. "Semi-Public Contests," Discussion Paper 2009-33, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  20. James W. Boudreau, 2008. "Sequential Pre-Marital Investment Games: Implications for Unemployment," Working papers 2008-45, University of Connecticut, Department of Economics. [Downloadable!]
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