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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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  1. Ellingsen, Tore, 1995. "The Evolution of Bargaining Behavior," SSE/EFI Working Paper Series in Economics and Finance 61, Stockholm School of Economics.
  2. Hackett, Steven C, 1994. "Is Relational Exchange Possible in the Absence of Reputations and Repeated Contact?," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 360-89, October.
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  8. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 83-114.
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  10. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
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  12. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
  13. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  14. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. H. Peyton Young, 1998. "Conventional Contracts," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 773-792.
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  18. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  19. Binmore, K. & Samuelson, L. & Gale, J., 1993. "Learning to be Imperfect: The Ultimatum Game," Working papers 9325, Wisconsin Madison - Social Systems.
  20. Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
  21. Drew Fudenberg & David K. Levine, 1993. "Self-Confirming Equilibrium," Levine's Working Paper Archive 2147, David K. Levine.
  22. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
  23. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 335-61, October.
  24. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603, Wisconsin Madison - Social Systems.
  25. Raquel Fernandez & Jacob Glazer, 1989. "Striking for a Bargain Between Two Completely Informed Agents," NBER Working Papers 3108, National Bureau of Economic Research, Inc.
  26. Gale, John & Binmore, Kenneth G. & Samuelson, Larry, 1995. "Learning to be imperfect: The ultimatum game," Games and Economic Behavior, Elsevier, vol. 8(1), pages 56-90.
  27. Binmore, Ken & Piccione, Michele & Samuelson, Larry, 1998. "Evolutionary Stability in Alternating-Offers Bargaining Games," Journal of Economic Theory, Elsevier, vol. 80(2), pages 257-291, June.
  28. Binmore, K. & Proulx, C. & Samuelson, L. & Swierzbinski, J., 1995. "Hard Bargains and Lost Opportunities," Working papers 9517, Wisconsin Madison - Social Systems.
  29. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
  30. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October.
  31. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
  32. Ken Binmore & Larry Samuelson, 1999. "Evolutionary Drift and Equilibrium Selection," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 363-393.
  33. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
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