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Hold-Up Problems and Firm Formation

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  • Gersbach, Hans
  • Haller, Hans

Abstract

Agents from a homogeneous population organize themselves into productive partnerships and are confronted with a hold-up problem when making relation-specific investments in those partnerships. The problem is mitigated if agents can leave a partnership in which they have invested, bear the costs yet forego the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4688.

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Date of creation: Oct 2004
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Handle: RePEc:cpr:ceprdp:4688

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Keywords: efficient firm structure; firm formation; hold-up problem; reinvestment-proof equilibria;

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