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Solving a hold-up problem may harm all firms: downstream R&D and transport-price contracts

Listed author(s):
  • Kazuhiro Takauchi

    (Faculty of Business and Commerce, Kansai University)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

In vertical relations, by raising input price after downstream research and development (R&D) investment, upstream firms can extract the R&D benefit and have an incentive to set higher input price. As downstream firms underinvest for fear of this hold-up by upstream firms, outputs and input-demand shrink, and all firms become worse off. Previous literature emphasizes that a fixed-price contract in which upstream firms first commit themselves to input prices and downstream firms subsequently invest can resolve the hold-up problem and make all firms better off. By contrast, we show that in a vertical relation between firm-specific carriers and exporters, the fixed-price contract of transport price can make all firms worse off because an efficiency improvement in exporters intensifies inter-regional competition. We also discuss the robustness of the result.

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File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2017/1707.pdf
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Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1707.

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Length: 30 pages
Date of creation: Mar 2017
Handle: RePEc:koe:wpaper:1707
Contact details of provider: Web page: http://www.econ.kobe-u.ac.jp
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