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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.

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  • 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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    4. 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.
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    8. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    9. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    10. Benjamin E. Hermalin & Michael L. Katz, 2009. "Information and the hold‐up problem," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 405-423, September.
    11. Daniel Krähmer, 2024. "The Hold-Up Problem with Flexible Unobservable Investments," ECONtribute Discussion Papers Series 278, University of Bonn and University of Cologne, Germany.
    12. Lau, Stephanie, 2011. "Investment incentives in bilateral trading," Games and Economic Behavior, Elsevier, vol. 73(2), pages 538-552.
    13. Kurtis Swope & Ryan Wielgus & Pamela Schmitt & John Cadigan, 2011. "Contracts, Behavior, and the Land-assembly Problem: An Experimental Study," Research in Experimental Economics, in: Experiments on Energy, the Environment, and Sustainability, pages 151-180, Emerald Group Publishing Limited.
    14. Schmitz, Patrick W., 2017. "Incomplete contracts, shared ownership, and investment incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 153-165.
    15. Ismail Saglam, 2019. "The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated Natural Monopoly," Journal of Industry, Competition and Trade, Springer, vol. 19(4), pages 617-639, December.
    16. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.
    17. Yoon, Dae-Hee, 2018. "Strategic delegation, stock options, and investment hold-up problems," Accounting, Organizations and Society, Elsevier, vol. 71(C), pages 1-14.
    18. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    19. Liang Guo, 2023. "Gathering Information Before Negotiation," Management Science, INFORMS, vol. 69(1), pages 200-219, January.
    20. Cuihong Li, 2020. "Supplier Competition and Cost Reduction with Endogenous Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 996-1010, September.
    21. Kawai, Keiichi, 2015. "Reputation for quality and adverse selection," European Economic Review, Elsevier, vol. 76(C), pages 47-59.
    22. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    23. Russell Golman & David Hagmann & George Loewenstein, 2017. "Information Avoidance," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 96-135, March.
    24. Rao, Neel, 2022. "Search equilibrium with unobservable investment," Games and Economic Behavior, Elsevier, vol. 133(C), pages 300-330.

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