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Ownership, Incentives, and the Hold-up Problem

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  • Tim Baldenius

    (Columbia University)

Abstract

Vertical integration is often proposed as a way to resolve hold-up problems. This ignores the empirical fact that division managers tend to maximize divisional (not firmwide) profit when investing. I develop a model with asymmetric information at the bargaining stage and investment returns taking the form of cash and gempire benefits.h Owners of a vertically integrated firm will then provide division managers with low-powered incentives to induce them to bargain more cooperatively, resulting in higher investments and overall profit as compared with nonintegration. Vertical integration therefore mitigates hold-up problems even without profit sharing.

Suggested Citation

  • Tim Baldenius, 2006. "Ownership, Incentives, and the Hold-up Problem," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 276-299, Summer.
    • Handle: RePEc:rje:randje:v:37:y:2006:2:p:276-299
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    Cited by:

    1. Yoon, Dae-Hee, 2018. "Strategic delegation, stock options, and investment hold-up problems," Accounting, Organizations and Society, Elsevier, vol. 71(C), pages 1-14.
    2. Tim Baldenius & Beatrice Michaeli, 2019. "Integrated ownership and managerial incentives with endogenous project risk," Review of Accounting Studies, Springer, vol. 24(4), pages 1450-1485, December.
    3. Pablo Casas-Arce & Thomas Kittsteiner & F. Asís Martínez-Jerez, 2019. "Contracting with Opportunistic Partners: Theory and Application to Technology Development and Innovation," Management Science, INFORMS, vol. 65(2), pages 842-858, February.
    4. Clemens Löffler & Thomas Pfeiffer & Ulf Schiller & Joachim Wagner, 2011. "Zentralisierung, Transferpreise und spezifische Investitionen: Ein selektiver Verfahrensvergleich," Schmalenbach Journal of Business Research, Springer, vol. 63(63), pages 1-33, January.

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