Hold-up and Sequential Specific Investments
We explore the hold-up problem when trading parties can make specific investments simultaneously or sequentially. As previously emphasized in the literature, sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. This is not always the case, however. A cost of sequencing investment is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can be detrimental to welfare; it can even prevent trade from occurring. This is a new result: it allows the choice about the timing of investment to be interpreted as a new form of hold-up. We also examine an investment game in which both parties would prefer to invest second (follow) rather than lead. This game displays some interesting dynamics. As the the number of potential investment periods is increased, the subgame perfect equilibrium can switch between a prisoners’ dilemma and a coordination game.
|Date of creation:||2001|
|Contact details of provider:|| Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia|
Phone: +61 3 8344 5355
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Web page: http://fbe.unimelb.edu.au/economics
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Department of Economics - Working Papers Series
808, The University of Melbourne.
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LSE Research Online Documents on Economics
19354, London School of Economics and Political Science, LSE Library.
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CEPR Discussion Papers
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