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Finite Horizon Holdup and How to Cross the River

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When should one pay the ferryman? When should one pay for delivery of a good if there are no institutions or these are too costly to enforce contracts? We suggest to break up the transaction into many small rounds of investment and payment. We show that the e?cient investment can be implemented in an e-subgame perfect equilibrium for any given e if there are su?ciently many rounds of investment. This shows that when the horizon is ?nite, the holdup problem that emerges from backwards induction is not robust. Equilibria with stable and robust strategies require more periods.

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  • Simon Martin & Karl H. Schlag, 2017. "Finite Horizon Holdup and How to Cross the River," Vienna Economics Papers vie1706, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1706
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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