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Does Evolution Solve the Hold-up Problem

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Author Info
Tore Ellingsen (Stockholm School of Economics)
Jack Robles (University of Colorado)

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Abstract

We examine the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship specific invesment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus generated by the investment. We show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on hte choice of equilibrium concept. In particular, we prove the following two results. (i) If bargaining proceeds according to the Nash demand game, any investment level is subgame perfect, but only efficient oucomes are evolutionarily stable. (ii) If bargaining proceeds according to the ultimatum game (with the trading partner as proposer,) only the minimal investment level is subgame perfect, but any investment level is evolutionarily stable.

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1525.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1525

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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. repec:att:wimass:199517r is not listed on IDEAS
  2. Ellingsen, Tore, 1997. "The Evolution of Bargaining Behavior," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 581-602, May.
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  3. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
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  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  5. repec:att:wimass:199325 is not listed on IDEAS
  6. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold-up Problem?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 106(3), pages 475-494, October. [Downloadable!] (restricted)
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  7. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April. [Downloadable!] (restricted)
  8. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April. [Downloadable!] (restricted)
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  9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  10. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
  11. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February. [Downloadable!] (restricted)
  12. Hackett, Steven C, 1994. "Is Relational Exchange Possible in the Absence of Reputations and Repeated Contact?," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 360-89, October.
  13. Young, H Peyton, 1998. "Conventional Contracts," Review of Economic Studies, Blackwell Publishing, vol. 65(4), pages 773-92, October. [Downloadable!] (restricted)
  14. Noeldecke,Georg Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B 228, University of Bonn, Germany.
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  15. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January. [Downloadable!] (restricted)
  16. Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October. [Downloadable!] (restricted)
  17. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October. [Downloadable!] (restricted)
  18. repec:att:wimass:19963r is not listed on IDEAS
  19. repec:att:wimass:199529 is not listed on IDEAS
  20. Binmore, Ken, et al, 1998. "Hard Bargains and Lost Opportunities," Economic Journal, Royal Economic Society, vol. 108(450), pages 1279-98, September. [Downloadable!] (restricted)
  21. Saez-Marti, Maria & Weibull, Jorgen W., 1999. "Clever Agents in Young's Evolutionary Bargaining Model," Journal of Economic Theory, Elsevier, vol. 86(2), pages 268-279, June. [Downloadable!] (restricted)
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  22. Fernandez, Raquel & Glazer, Jacob, 1991. "Striking for a Bargain between Two Completely Informed Agents," American Economic Review, American Economic Association, vol. 81(1), pages 240-52, March. [Downloadable!] (restricted)
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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. Thomas Troger, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series 19-02, Department of Economics, UC Santa Barbara. [Downloadable!]
  2. Ferdinand von Siemens, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Papers 57, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  3. Thomas Troger, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series wp19-02, Department of Economics, UC Santa Barbara. [Downloadable!]
  4. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," Working Paper Series in Economics and Finance 357, Stockholm School of Economics. [Downloadable!]
    Other versions:
  5. Birendra K. Rai, 2006. "Evolution of Division Rules," Discussion Papers on Strategic Interaction 2006-27, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  6. Siemens, Ferdinand von, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Papers in Economics 518, University of Munich, Department of Economics. [Downloadable!]
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