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The hold-up problem with flexible unobservable investments

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  • Krähmer, Daniel

Abstract

The paper studies the canonical hold-up problem with one-sided investment by the buyer and full bargaining power by the seller. The buyer can covertly choose any distribution of valuations at a cost and privately observes her valuation. I show that, unlike in the well-understood case with linear costs, if investment costs are strictly convex, the buyer’s equilibrium utility is strictly positive and total welfare is strictly higher than when valuations are public information, thus alleviating the severity of the hold-up problem. In fact, when costs are mean-based or display decreasing risk, the equilibrium outcome might be efficient.

Suggested Citation

  • Krähmer, Daniel, 2026. "The hold-up problem with flexible unobservable investments," Journal of Economic Theory, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:jetheo:v:235:y:2026:i:c:s0022053126000682
    DOI: 10.1016/j.jet.2026.106205
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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