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Hold-up and Sequential Specific Investments

Author

Listed:
  • Vladimir Smirnov

    () (University of Sydney)

  • Andrew Wait

    () (University of Sydney)

Abstract

We explore the hold-up problem when parties can make investments simultaneously or sequentially. Sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. However, a cost of sequencing is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can prevent trade from occurring; this can be interpreted as a new form of hold-up. If both parties prefer to invest second, as the number of potential investment periods is increased, the subgame-perfect equilibrium can switch between a prisoners' dilemma and a coordination game.

Suggested Citation

  • Vladimir Smirnov & Andrew Wait, 2004. "Hold-up and Sequential Specific Investments," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 386-400, Summer.
  • Handle: RePEc:rje:randje:v:35:y:2004:2:p:386-400
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    References listed on IDEAS

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    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    2. Smirnov, Vladimir & Wait, Andrew, 2004. "Timing of investments, holdup and total welfare," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 413-425, March.
    3. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 115-138.
    4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    5. Anat R. Admati & Motty Perry, 1991. "Joint Projects without Commitment," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 259-276.
    6. Darwin V. Neher, 1999. "Staged Financing: An Agency Perspective," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 255-274.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. De Fraja, Gianni, 1999. "After You Sir. Hold-Up, Direct Externalities, and Sequential Investment," Games and Economic Behavior, Elsevier, vol. 26(1), pages 22-39, January.
    9. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-837, September.
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    Cited by:

    1. repec:eee:jbfina:v:81:y:2017:i:c:p:200-206 is not listed on IDEAS
    2. Chen, Bin R. & Chiu, Y. Stephen, 2010. "Public-private partnerships: Task interdependence and contractibility," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 591-603, November.
    3. Bin R. Chen & Y. Stephen Chiu, 2014. "Task Interdependence and Noncontractibility in Public-Good Provision," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 170(4), pages 731-748, December.
    4. Smirnov, Vladimir & Wait, Andrew, 2004. "Timing of investments, holdup and total welfare," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 413-425, March.
    5. Thomas Ehrmann & Karl-Hans Hartwig & Torsten Marner & Hendrik Schmale, 2009. "Specific Investments and Ownership Structures in Railways – An Experimental Analysis," Working Papers 12, Institute of Transport Economics, University of Muenster.
    6. Maxim Mai & Vladimir Smirnov & Andrew Wait, 2014. "Ownership, Access, and Sequential Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 47(1), pages 203-231, February.
    7. Oll, Grete, 2014. "Opportunistic Disclosure in the Inter-Organizational Relationships," Discussion Papers of Business and Economics 21/2014, University of Southern Denmark, Department of Business and Economics.
    8. AGRELL, Per & KASPERZEC, Roman, 2010. "Dynamic joint investments in supply chains under information asymmetry," CORE Discussion Papers 2010085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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