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Information and bargaining in the hold‐up problem

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  • Stephanie Lau

Abstract

This article incorporates an information structure with partial information into the canonical hold‐up problem. The optimal information structure balances the tradeoff between ex ante efficiency (the “information rent” effect) and ex post efficiency (the “bargaining disagreement” effect). With one‐shot bargaining, it occurs at an intermediate level of information asymmetry; when there is repeated bargaining, it is attained with perfect asymmetry. Asymmetric information, the parameter that is frequently ignored in the literature, turns out to be an important welfare instrument for the hold‐up problem. Our results therefore provide a basis for institutional design regarding the optimal control of information flow.

Suggested Citation

  • Stephanie Lau, 2008. "Information and bargaining in the hold‐up problem," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 266-282, March.
    • Handle: RePEc:bla:randje:v:39:y:2008:i:1:p:266-282
    DOI: 10.1111/j.1756-2171.2008.00013.x
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    References listed on IDEAS

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    10. Erol Akçay & Adam Meirowitz & Kristopher W. Ramsay, 2018. "Two-sided unobservable investment, bargaining, and efficiency," Review of Economic Design, Springer;Society for Economic Design, vol. 22(3), pages 123-147, December.
    11. Liang Guo, 2023. "Gathering Information Before Negotiation," Management Science, INFORMS, vol. 69(1), pages 200-219, January.
    12. Kawai, Keiichi, 2015. "Reputation for quality and adverse selection," European Economic Review, Elsevier, vol. 76(C), pages 47-59.
    13. Rao, Neel, 2022. "Search equilibrium with unobservable investment," Games and Economic Behavior, Elsevier, vol. 133(C), pages 300-330.
    14. Daniel Krähmer, 2024. "The hold-up problem with flexible unobservable investments," CRC TR 224 Discussion Paper Series crctr224_2024_523, University of Bonn and University of Mannheim, Germany.
    15. Schweizer, Urs, 2015. "Incentives to Acquire Information under Mandatory versus Voluntary Disclosure," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112868, Verein für Socialpolitik / German Economic Association.
    16. Dilmé, Francesc, 2019. "Pre-trade private investments," Games and Economic Behavior, Elsevier, vol. 117(C), pages 98-119.
    17. Daniel Krähmer, 2024. "The Hold-Up Problem with Flexible Unobservable Investments," ECONtribute Discussion Papers Series 278, University of Bonn and University of Cologne, Germany.
    18. Schmitz, Patrick W., 2017. "Incomplete contracts, shared ownership, and investment incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 153-165.
    19. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.
    20. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    21. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    22. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    23. Yoon, Dae-Hee, 2018. "Strategic delegation, stock options, and investment hold-up problems," Accounting, Organizations and Society, Elsevier, vol. 71(C), pages 1-14.
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    25. Russell Golman & David Hagmann & George Loewenstein, 2017. "Information Avoidance," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 96-135, March.

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