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Does Evolution Solve the Hold-up Problem?

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  • Ellingsen, Tore

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Robles, Jack

    (University of Colorado, Department of Economics)

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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Bibliographic 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
Date of revision:
Handle: RePEc:hhs:hastef:0358

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Keywords: Specific investments; opportunism; evolution; fairness;

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References

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Citations

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Cited by:
  1. Luciano Andreozzi, 2008. "Property Rights and Investments: An Evolutionary Approach," Department of Economics Working Papers, Department of Economics, University of Trento, Italia 0822, Department of Economics, University of Trento, Italia.
  2. Christian Ewerhart, . "The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining between Inequity-Averse Agents," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 203, Institute for Empirical Research in Economics - University of Zurich.
  3. Kevin Hasker, 2014. "The Emergent Seed: A Representation Theorem for Models of Stochastic Evolution and two formulas for Waiting Time," Levine's Working Paper Archive 786969000000000954, David K. Levine.
  4. L. Bagnoli & G. Negroni, 2013. "Egalitarianism. An evolutionary perspective," Working Papers wp888, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Levine's Working Paper Archive 786969000000000676, David K. Levine.
  6. Troger, Thomas, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series qt3f2509gz, Department of Economics, UC Santa Barbara.
  7. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," Working Paper Series in Economics and Finance, Stockholm School of Economics 357, Stockholm School of Economics.
  8. Calabuig, Vicente & Olcina, Gonzalo, 2009. "Cooperation and cultural transmission in a coordination game," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(1), pages 188-201, October.
  9. 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, Society for Computational Economics, Society for Computational Economics, vol. 28(4), pages 371-397, November.
  10. Bahry, Donna L. & Wilson, Rick K., 2006. "Confusion or fairness in the field? Rejections in the ultimatum game under the strategy method," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 60(1), pages 37-54, May.
  11. Siemens, Ferdinand von, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Paper Series of 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 57, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  12. Dawid, Herbert & MacLeod, W. Bentley, 2008. "Hold-up and the evolution of investment and bargaining norms," Games and Economic Behavior, Elsevier, Elsevier, vol. 62(1), pages 26-52, January.
  13. Kurtis Swope & Pamela Schmitt & John Cadigan & Ryan Wielgus, 2010. "Contracts, Behavior, and the Land-Assembly Problem:An Experimental Study," Departmental Working Papers, United States Naval Academy Department of Economics 29, United States Naval Academy Department of Economics.
  14. Birendra K. Rai, 2006. "Evolution of Division Rules," Papers on Strategic Interaction, Max Planck Institute of Economics, Strategic Interaction Group 2006-27, Max Planck Institute of Economics, Strategic Interaction Group.
  15. L. Bagnoli & G. Negroni, 2012. "On the coevolution of social norms in primitive societies," Working Papers wp858, Dipartimento Scienze Economiche, Universita' di Bologna.
  16. Troger, Thomas, 2002. "Double Auctions, Ex-Post Participation Constraints, and the Hold-Up Problem," University of California at Santa Barbara, Economics Working Paper Series qt5qv060md, Department of Economics, UC Santa Barbara.
  17. Olcina, Gonzalo & Penarrubia, Concepcion, 2004. "Hold up and intergenerational transmission of preferences," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 54(1), pages 111-132, May.
  18. Siemens, Ferdinand von, 2005. "Bargaining under Incomplete Information, Fairness, and the Hold-Up Problem," Discussion Papers in Economics, University of Munich, Department of Economics 518, University of Munich, Department of Economics.
  19. Andreozzi, Luciano, 2010. "An evolutionary theory of social justice: Choosing the right game," European Journal of Political Economy, Elsevier, Elsevier, vol. 26(3), pages 320-329, September.

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