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A simple economic teaching experiment on the hold-up problem

Author

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  • Balkenborg, Dieter
  • Kaplan, Todd R
  • Miller, Tim

Abstract

The hold-up problem is central to the theory of incomplete contracts. It shows how the difficulty to write complete contracts and the resulting need to renegotiate can lead to underinvestment. We describe the design of a simple teaching experiment that illustrates the hold-up problem. The model used is a simple perfect information game. The experiment can hence also be used to illustrate the concept of subgame perfect equilibrium and the problem of making non-binding commitments.

Suggested Citation

  • Balkenborg, Dieter & Kaplan, Todd R & Miller, Tim, 2010. "A simple economic teaching experiment on the hold-up problem," MPRA Paper 24772, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24772
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    References listed on IDEAS

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    1. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
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    3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    4. Harrison, Mark & Markevich, Andrei, "undated". "Quantity Versus Quality in the Soviet Market for Weapons," Economic Research Papers 269771, University of Warwick - Department of Economics.
    5. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    6. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
    7. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-837, September.
    8. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    9. Coase, R H, 2000. "The Acquisition of Fisher Body by General Motors," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 15-31, April.
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    Cited by:

    1. Kusterer, David J. & Schmitz, Patrick W., 2020. "Public goods, property rights, and investment incentives: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 514-532.

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    Keywords

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    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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