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Investments and the holdup problem in a matching market

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  • Bester, Helmut

Abstract

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first-best.

Suggested Citation

  • Bester, Helmut, 2009. "Investments and the holdup problem in a matching market," Discussion Papers 2009/7, Free University Berlin, School of Business & Economics.
    • Handle: RePEc:zbw:fubsbe:20097
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    Cited by:

    1. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
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    3. Elliott, M. & Talamàs, E., 2020. "Bargaining Foundations for Price Taking in Matching Markets," Cambridge Working Papers in Economics 2070, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Holdup Problem; Matching Market; Investments;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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