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Hold-up, Asset Ownership, and Reference Points

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  • Oliver Hart

Abstract

We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13540.

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Date of creation: Oct 2007
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Publication status: published as Oliver Hart, 2009. "Hold-Up, Asset Ownership, and Reference Points-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 267-300, February.
Handle: RePEc:nbr:nberwo:13540

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  1. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(481), pages 539-558, July.
  2. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 39-84, February.
  3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1777, C.E.P.R. Discussion Papers.
  5. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, American Economic Association, vol. 61(2), pages 112-23, May.
  6. Klein, Benjamin & Murphy, Kevin M, 1997. "Vertical Integration as a Self-Enforcing Contractual Arrangement," American Economic Review, American Economic Association, American Economic Association, vol. 87(2), pages 415-20, May.
  7. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 34(3), pages 444-63, July.
  8. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 45(3), pages 629-685, September.
  9. Wernerfelt, Birger, 1997. "On the Nature and Scope of the Firm: An Adjustment-Cost Theory," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 70(4), pages 489-514, October.
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