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A simple economic teaching experiment on the hold-up problem

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  • Balkenborg, Dieter
  • Kaplan, Todd R
  • Miller, Tim

Abstract

The hold-up problem is central to the theory of incomplete contracts. It shows how the difficulty to write complete contracts and the resulting need to renegotiate can lead to underinvestment. We describe the design of a simple teaching experiment that illustrates the hold-up problem. The model used is a simple perfect information game. The experiment can hence also be used to illustrate the concept of subgame perfect equilibrium and the problem of making non-binding commitments.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24772.

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Date of creation: 03 Sep 2010
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Handle: RePEc:pra:mprapa:24772

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Keywords: classroom experiment; holdup problem;

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  1. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
  2. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  3. Coase, R H, 2000. "The Acquisition of Fisher Body by General Motors," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 15-31, April.
  4. Pol Antràs, 2003. "Firms, Contracts, And Trade Structure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1375-1418, November.
  5. Mark Harrison & Andrei Markevich, 2007. "Quantity Versus Quality in the Soviet Market for Weapons," Working Papers w0109, Center for Economic and Financial Research (CEFIR).
  6. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
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