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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)

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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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Keywords: Specific investments; opportunism; evolution; fairness;

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References

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  1. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603r, Wisconsin Madison - Social Systems.
  2. Binmore, Ken & Piccione, Michele & Samuelson, Larry, 1998. "Evolutionary Stability in Alternating-Offers Bargaining Games," Journal of Economic Theory, Elsevier, vol. 80(2), pages 257-291, June.
  3. Binmore, K. & Proulx, C. & Samuelson, L. & Swierzbinski, J., 1996. "Hard Bargains and Lost Opportunities," Working papers 9517r, Wisconsin Madison - Social Systems.
  4. repec:att:wimass:9325 is not listed on IDEAS
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Citations

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Cited by:
  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.
  2. Birendra K. Rai, 2006. "Evolution of Division Rules," Papers on Strategic Interaction 2006-27, Max Planck Institute of Economics, Strategic Interaction Group.
  3. Calabuig, Vicente & Olcina, Gonzalo, 2009. "Cooperation and cultural transmission in a coordination game," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 188-201, October.
  4. Christian Ewerhart, . "The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining between Inequity-Averse Agents," IEW - Working Papers 203, Institute for Empirical Research in Economics - University of Zurich.
  5. 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.
  6. 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, vol. 60(1), pages 37-54, May.
  7. Dawid, Herbert & MacLeod, W. Bentley, 2008. "Hold-up and the evolution of investment and bargaining norms," Games and Economic Behavior, Elsevier, vol. 62(1), pages 26-52, January.
  8. Luciano Andreozzi, 2008. "Property Rights and Investments: An Evolutionary Approach," Department of Economics Working Papers 0822, Department of Economics, University of Trento, Italia.
  9. 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.
  10. Sebastian Kranz, 2013. "Relational Contracting, Repeated Negotiations, and Hold-Up," Cowles Foundation Discussion Papers 1888, Cowles Foundation for Research in Economics, Yale University.
  11. 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, vol. 28(4), pages 371-397, November.
  12. L. Bagnoli & G. Negroni, 2013. "Egalitarianism. An evolutionary perspective," Working Papers wp888, Dipartimento Scienze Economiche, Universita' di Bologna.
  13. Olcina, Gonzalo & Penarrubia, Concepcion, 2004. "Hold up and intergenerational transmission of preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 111-132, May.
  14. L. Bagnoli & G. Negroni, 2012. "On the coevolution of social norms in primitive societies," Working Papers wp858, Dipartimento Scienze Economiche, Universita' di Bologna.
  15. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold-up Problem?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 475-494, October.
  16. 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 57, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  17. Kurtis Swope & Pamela Schmitt & John Cadigan & Ryan Wielgus, 2010. "Contracts, Behavior, and the Land-Assembly Problem:An Experimental Study," Departmental Working Papers 29, United States Naval Academy Department of Economics.
  18. Andreozzi, Luciano, 2010. "An evolutionary theory of social justice: Choosing the right game," European Journal of Political Economy, Elsevier, vol. 26(3), pages 320-329, September.

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