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Does Evolution Solve the Hold-up Problem?

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Author Info
Ellingsen, Tore () (Dept. of Economics, Stockholm School of Economics)
Robles, Jack (University of Colorado, Department of Economics)

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Abstract

The paper examines the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship-specific investment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus that the investment has generated. We show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the 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 outcomes are stochastically 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 stochastically stable.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 358.

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Length: 26 pages
Date of creation: 17 Feb 2000
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Handle: RePEc:hhs:hastef:0358

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Related research
Keywords: Specific investments; opportunism; evolution; fairness;

Other versions of this item:

Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.
    Other versions:
  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)
    Other versions:
  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)
    Other versions:
  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. Drew Fudenberg & David K. Levine, 1993. "Self-Confirming Equilibrium," Levine's Working Paper Archive 2147, David K. Levine. [Downloadable!]
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  14. Young, H Peyton, 1998. "Conventional Contracts," Review of Economic Studies, Blackwell Publishing, vol. 65(4), pages 773-92, October. [Downloadable!] (restricted)
  15. 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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  16. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January. [Downloadable!] (restricted)
  17. 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)
  18. 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)
  19. repec:att:wimass:19963r is not listed on IDEAS
  20. repec:att:wimass:199529 is not listed on IDEAS
  21. Binmore, Ken, et al, 1998. "Hard Bargains and Lost Opportunities," Economic Journal, Royal Economic Society, vol. 108(450), pages 1279-98, September. [Downloadable!] (restricted)
  22. 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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  23. 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)
    Other versions:
Full references

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. 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!]
  2. Herbert Dawid & Joern Dermietzel, 2006. "How Robust is the Equal Split Norm? Responsive Strategies, Selection Mechanisms and the Need for Economic Interpretation of Simulation Parameters," Computational Economics, Springer, vol. 28(4), pages 371-397, November. [Downloadable!] (restricted)
  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 19-02, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
  4. 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!]
  5. 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:
  6. Birendra K. Rai, 2006. "Evolution of Division Rules," Papers on Strategic Interaction 2006-27, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
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