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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. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," SSE/EFI Working Paper Series in Economics and Finance 357, Stockholm School of Economics.
  2. van Damme, E.E.C. & Selten, R. & Winter, E., 1989. "Alternating bid bargaining with a smallest money unit," Discussion Paper 1989-32, Tilburg University, Center for Economic Research.
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