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Does Evolution Solve the Hold-up Problem

  • Tore Ellingsen

    (Stockholm School of Economics)

  • Jack Robles

    (University of Colorado)

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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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1525.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1525
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