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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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  15. Van Damme, Eric & Selten, Reinhard & Winter, Eyal, 1990. "Alternating bid bargaining with a smallest money unit," Games and Economic Behavior, Elsevier, vol. 2(2), pages 188-201, June.
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  25. 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.
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  27. H. Peyton Young, 1998. "Conventional Contracts," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 773-792.
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  29. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  30. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
  31. Binmore, K. & Piccione, M. & Samuelson, L., 1996. "Evolutionary Stability in Alternating-Offers Bargaining Games," Working papers 9603r, Wisconsin Madison - Social Systems.
  32. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October.
  33. 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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