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Information and the hold-up problem

  • Benjamin E. Hermalin
  • Michael L. Katz

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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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 3 ()
Pages: 405-423

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Handle: RePEc:bla:randje:v:40:y:2009:i:3:p:405-423
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  1. Haucap, Justus & Wey, Christian, 2003. "Unionization Structures and Innovation Incentives," CEPR Discussion Papers 4079, C.E.P.R. Discussion Papers.
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  8. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
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  13. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
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