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Does Evolution Solve the Hold-Up Problem?

  • Ellingsen, Tore
  • Robles, Jack

We examine the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship specific invesment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus generated by the investment. We show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on hte choice of equilibrium concept. In particular, we prove the following two results. (i) If bargaining proceeds according to the Nash demand game, any investment level is subgame perfect, but only efficient oucomes are evolutionarily stable. (ii) If bargaining proceeds according to the ultimatum game (with the trading partner as proposer,) only the minimal investment level is subgame perfect, but any investment level is evolutionarily stable.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 39 (2002)
Issue (Month): 1 (April)
Pages: 28-53

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Handle: RePEc:eee:gamebe:v:39:y:2002:i:1:p:28-53
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  2. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
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  7. Binmore, K. & Samuelson, L., 1995. "Evolutionary Drift and Equilibrium Selection," Working papers 9529, Wisconsin Madison - Social Systems.
  8. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603, Wisconsin Madison - Social Systems.
  9. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  10. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 335-61, October.
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  13. Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
  14. Ken Binmore & Larry Samuelson, 1999. "Evolutionary Drift and Equilibrium Selection," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 363-393.
  15. H. Peyton Young, 1998. "Conventional Contracts," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 773-792.
  16. Binmore, Ken & Piccione, Michele & Samuelson, Larry, 1998. "Evolutionary Stability in Alternating-Offers Bargaining Games," Journal of Economic Theory, Elsevier, vol. 80(2), pages 257-291, June.
  17. Binmore, K. & Proulx, C. & Samuelson, L. & Swierzbinski, J., 1995. "Hard Bargains and Lost Opportunities," Working papers 9517, Wisconsin Madison - Social Systems.
  18. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  19. Jean Tirole, 1985. "Procurement and Renegotiation," Working papers 362, Massachusetts Institute of Technology (MIT), Department of Economics.
  20. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold-up Problem?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 475-494, October.
  21. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October.
  22. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 83-114.
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  24. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  25. Gale, John & Binmore, Kenneth G. & Samuelson, Larry, 1995. "Learning to be imperfect: The ultimatum game," Games and Economic Behavior, Elsevier, vol. 8(1), pages 56-90.
  26. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
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  29. repec:cup:cbooks:9780521555838 is not listed on IDEAS
  30. Binmore, K. & Samuelson, L. & Gale, J., 1993. "Learning to be Imperfect: The Ultimatum Game," Working papers 9325, Wisconsin Madison - Social Systems.
  31. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
  32. Tore Ellingsen, 1997. "The Evolution of Bargaining Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 581-602.
  33. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
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