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Holdups and Holdouts: What do They Have in Common?

Author

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  • Thomas J. Miceli

    (University of Connecticut)

  • Kathleen Segerson

    (University of Connecticut)

Abstract

The holdup and holdout problems arise in different contexts, but they share certain fundamental similarities that have not generally been recognized. In particular, both involve activities requiring an up-front, non-salvageable investment, and both require the investor to purchase an input, the price of which is determined by bargaining after the initial investment has been made. The effect of the up-front investment is to reduce the investor's bargaining power with the seller of the input. The anticipation of the outcome of this bargaining creates a disincentive for the investor to undertake the project in the first place, causing some efficient projects to be foregone.

Suggested Citation

  • Thomas J. Miceli & Kathleen Segerson, 2011. "Holdups and Holdouts: What do They Have in Common?," Working papers 2011-06, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2011-06
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    File URL: http://web2.uconn.edu/economics/working/2011-06.pdf
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    Cited by:

    1. Thomas J. Miceli, 2013. "The Color of Law: An Economic Theory of Legal Boundaries," Working papers 2013-17, University of Connecticut, Department of Economics.

    More about this item

    Keywords

    Holdup problem; holdout problem; non-salvageable investments; eminent domain;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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