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The Effect of Hold-up Problems on Corporate Investment: Evidence from Import Tariff Reductions

Author

Listed:
  • Martin, Thorsten
  • Otto, Clemens A.

Abstract

We provide empirical evidence of the importance of hold-up problems for investment decisions in a large number of U.S. manufacturing industries. We exploit variation in the severity of hold-up problems between upstream suppliers and downstream customers resulting from import tariff reductions in upstream industries. We find that downstream customers respond by increasing investment. As theory predicts, the effect is stronger if the customers have little bargaining power and are not vertically integrated with their suppliers, if the suppliers produce differentiated inputs, if high uncertainty inhibits the use of long-term contracts, and if shipping costs are low.

Suggested Citation

  • Martin, Thorsten & Otto, Clemens A., 2016. "The Effect of Hold-up Problems on Corporate Investment: Evidence from Import Tariff Reductions," HEC Research Papers Series 1208, HEC Paris, revised 27 Jun 2017.
    • Handle: RePEc:ebg:heccah:1208
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    More about this item

    Keywords

    Hold-up Problems; Corporate Investment; Supply Chains; Import Tariffs;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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