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Investments and the Holdup Problem in a Matching Market

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  • Bester, Helmut

Abstract

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first-best.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7332.

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Date of creation: Jun 2009
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Handle: RePEc:cpr:ceprdp:7332

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Keywords: Holdup Problem; Investments; Matching Market;

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References

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Cited by:
  1. Schmitz, Patrick W., 2009. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," CEPR Discussion Papers 7584, C.E.P.R. Discussion Papers.
  2. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.

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