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A Dynamic Theory of Holdup

The holdup problem arises when parties negotiate to divide the surplus generated by their ex ante noncontractable investments. We study this problem in a model which, unlike the stylized static model, allows the parties to continue to invest until they agree on the terms of trade. These possible investment dynamics overturn the conventional wisdom dramatically. First, the holdup problem need not entail underinvestment-type inefficiencies when the parties are sufficiently patient. Second, inefficiencies can arise unambiguously, but the reason for their occurrence differs from the one recognized by the static model. This latter finding sheds new light on the design of contracts and organizations.

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File URL: http://www.econ.ed.ac.uk/papers/id74_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 74.

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Length: 32
Date of creation: 20 Nov 2001
Date of revision:
Handle: RePEc:edn:esedps:74
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  2. 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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  9. 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.
  10. Gale, Douglas, 1998. "Monotone Games with Positive Spillovers," Working Papers 98-34, C.V. Starr Center for Applied Economics, New York University.
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  12. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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  14. Oliver Hart & John Moore, 1998. "Foundations of incomplete contracts," LSE Research Online Documents on Economics 19354, London School of Economics and Political Science, LSE Library.
  15. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
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  19. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 583-601.
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