The Hold-Up Problem and Communication: Experimental Evidence

The hold-up problem plays a central role in organizational and institutional economics. According to standard theory, an investor may have insufficient incentives to invest in a relationship with a trading partner when the investor anticipates that in future negotiations the trading partner might behave opportunistically, so the investor's costs might not be recouped. In a prominent paper-and-pencil experiment, Ellingsen and Johannesson (2004a) have shown that communication can mitigate the hold-up problem. They allow either the investor or the trading partner to send a single text message to the other player. In order to study the robustness of their findings, we replicate their setup in an online experiment, allowing for a larger number of observations and a different subject pool. Moreover, we extend the original setup by adding a treatment with bilateral communication in order to find out whether or not the possibility of arguing back and forth can further alleviate the hold-up problem.