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Does Competition Solve the Hold-up Problem?

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Author Info
Felli, Leonardo
Roberts, Kevin W S

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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 additional equilibria with coordination failures. Different types of inefficiency arise when sellers undertake investment before market competition. These inefficiencies lead to sellers’ under-investments 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3535.

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Date of creation: Sep 2002
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Handle: RePEc:cpr:ceprdp:3535

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Related research
Keywords: competition hold-up problem matching specific investments

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Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
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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!]
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  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. Peters, Michael, 2004. "The Pre-Marital Investment Game," Micro Theory Working Papers peters-04-02-18-01-42-09, Microeconomics.ca Website, revised 13 Sep 2006. [Downloadable!]
  6. Jansen, Marcel, 2004. "Can Job Competition Prevent Hold-Ups?," IZA Discussion Papers 988, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Harold Cole & George Mailath & Andrew Postlewaite, 2001. "Efficient Non-Contractible Investments in Finite Economies," Advances in Theoretical Economics, Berkeley Electronic Press, vol. 1(advances/), pages 1005-1005. [Downloadable!] (restricted)
  8. Yeon-Koo Che & Ian Gale, 2003. "Optimal Design of Research Contests," American Economic Review, American Economic Association, vol. 93(3), pages 646-671, June. [Downloadable!] (restricted)
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  9. Peters, Michael, 2006. "Truncated Hedonic Equilibrium," Micro Theory Working Papers peters-06-04-11-02-42-39, Microeconomics.ca Website, revised 17 Jan 2007. [Downloadable!]
  10. 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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  12. Shingo Ishiguro, 2007. "Holdup, Search and Inefficiency," Discussion Papers in Economics and Business 07-13, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
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  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!]
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