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Information and the hold-up problem

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  • Benjamin E. Hermalin
  • Michael L. Katz

Abstract

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting hold-up problem is affected by the seller's information about the investing party's likely returns from its investment. Our principal focus is on the effects of the investment's being observable by the noninvesting party. We establish conditions under which the seller's ability to observe the buyer's investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable. Copyright (c) 2009, RAND..

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  • 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.
  • Handle: RePEc:bla:randje:v:40:y:2009:i:3:p:405-423
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    Cited by:

    1. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    2. Jullien, Bruno & Sand-Zantman, Wilfried, 2012. "Internet Regulation, Two-Sided Pricing, and Sponsored Data," IDEI Working Papers 735, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2016.
    3. Katz, Michael L., 2013. "Provider competition and healthcare quality: More bang for the buck?," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 612-625.
    4. Marina Halac, 2015. "Investing in a relationship," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 165-185, March.
    5. Jullien, Bruno & Sand-Zantman, Wilfried, 2014. "Pricing Internet Traffic: Exclusion, Signalling and Screening," CEPR Discussion Papers 9896, C.E.P.R. Discussion Papers.

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