Equilibrium incentives and accumulation of relational skills in a dynamic model of hold up
We construct a dynamic model of Holdup by applying a framework in capital accumulation games, and derive the Markov perfect equilibrium of the game. Firms specific investments for the current period affect the relational skill (state variable) in the next period. Therefore, firms decide their individual investment levels taking into account their impact on strategic interactions from the next period onwards. By considering hypothetically the impact of firms' current investment decisions in the next period only, and by ignoring subsequent periods, a useful understanding about the relationship between two-period and infinite horizon formulations can be gained. We also compare the equilibrium incentives in both two-period and infinite horizon formulations, and investigate the equilibrium comparative statics and its implications.
Volume (Year): 12 (2006)
Issue (Month): 7 ()
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- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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