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Opportunism in Sequential Investment Settings: On Holdups and Holdouts

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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. Remedies for the two problems, though outwardly different, share features that reflect the common source of their inefficiency.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2014-08.

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Length: 31 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:uct:uconnp:2014-08

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Keywords: Holdup problem; holdout problem; non-salvageable investments; eminent domain; contracts; vertical integration;

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  1. Asami, Yasushi, 1985. "A game-theoretic approach to the division of profits from economic land development," Regional Science and Urban Economics, Elsevier, vol. 18(2), pages 233-246, May.
  2. Aaron S. Edlin, 1994. "Cadillac Contracts and Up-Front Payments: Efficient Investment Under Expectation Damages," NBER Working Papers 4915, National Bureau of Economic Research, Inc.
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  7. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
  8. Strange William C., 1995. "Information, Holdouts, and Land Assembly," Journal of Urban Economics, Elsevier, vol. 38(3), pages 317-332, November.
  9. Arthur Zillante & Peter M. Schwarz & Dustin C. Read, 2014. "Land Aggregation Using Contingent and Guaranteed Payments," Southern Economic Journal, Southern Economic Association, vol. 80(3), pages 702-727, January.
  10. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 57-82, January.
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