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Holdups and Holdouts: What do They Have in Common?

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  • Thomas J. Miceli

    (University of Connecticut)

  • Kathleen Segerson

    (University of Connecticut)

Abstract

The holdup and holdout problems arise in different contexts, but they share certain fundamental similarities that have not generally been recognized. In particular, both involve activities requiring an up-front, non-salvageable investment, and both require the investor to purchase an input, the price of which is determined by bargaining after the initial investment has been made. The effect of the up-front investment is to reduce the investor's bargaining power with the seller of the input. The anticipation of the outcome of this bargaining creates a disincentive for the investor to undertake the project in the first place, causing some efficient projects to be foregone.

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File URL: http://web2.uconn.edu/economics/working/2011-06.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2011-06.

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Length: 21 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:uct:uconnp:2011-06

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Web page: http://www.econ.uconn.edu/
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Keywords: Holdup problem; holdout problem; non-salvageable investments; eminent domain;

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Cited by:
  1. Thomas J. Miceli, 2013. "The Color of Law: An Economic Theory of Legal Boundaries," Working papers 2013-17, University of Connecticut, Department of Economics.

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