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The hold-up problem, innovations, and limited liability

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  • Schmitz, Patrick W.

Abstract

An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power.

Suggested Citation

  • Schmitz, Patrick W., 2012. "The hold-up problem, innovations, and limited liability," CEPR Discussion Papers 9050, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9050
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    References listed on IDEAS

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    Cited by:

    1. Schmitz, Patrick W., 2020. "Moral hazard and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 186(C).
    2. Hodaka Morita & Maroš Servátka, 2016. "Does Group Identity Prevent Inefficient Investment in Outside Options? An Experimental Investigation," Research in Experimental Economics, in: Experiments in Organizational Economics, volume 19, pages 105-126, Emerald Group Publishing Limited.

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    More about this item

    Keywords

    Hold-up problem; Incomplete contracts; Limited liability; Research and development;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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