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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, 1997. "The Evolution of Bargaining Behavior," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 581-602, May.
  2. Fernandez, Raquel & Glazer, Jacob, 1991. "Striking for a Bargain between Two Completely Informed Agents," American Economic Review, American Economic Association, vol. 81(1), pages 240-52, March.
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  4. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
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  6. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
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  8. Binmore, K. & Proulx, C. & Samuelson, L. & Swierzbinski, J., 1996. "Hard Bargains and Lost Opportunities," Working papers 9517r, Wisconsin Madison - Social Systems.
  9. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  10. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  11. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603r, Wisconsin Madison - Social Systems.
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  13. Weibull, Jörgen W. & Saez-Marti, Maria, 1998. "Clever Agents in Young's Evolutionary Bargaining Model," Working Paper Series 507, Research Institute of Industrial Economics.
  14. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
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  17. Ellingsen, Tore & Johannesson, Magnus, 2000. "Is There a Hold-up Problem?," SSE/EFI Working Paper Series in Economics and Finance 357, Stockholm School of Economics.
  18. 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.
  19. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October.
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  26. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
  27. 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.
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  29. 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.
  30. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  31. Noeldecke,Georg & Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B 228, University of Bonn, Germany.
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