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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 357:
Is There a Hold-up Problem?

Tore Ellingsen () and Magnus Johannesson ()

Abstract: Most literature on the hold-up problem starts from the assumption that ex post bargaining outcomes are insensitive to prior investment costs. We argue that this approach is unsatisfactory. If the bargaining procedure is relatively symmetric, it typically admits multiple perfect equilibria, some of which give the investor a high enough payoff to sustain efficient investment. Even if the bargaining procedure is asymmetric and rigged against the investor, there may be investment if agents are driven by moral concerns or if communication creates commitment. Laboratory experiments indicate that communication is necessary and sufficient for agents to coordinate on efficient outcomes when the bargaining game is symmetric. When the bargaining game is rigged against the investor, the hold-up problem is mitigated, but not eliminated, by moral behavior. Communication is quite credible, and we find that promises are more believable that threats.

Keywords: Specific investments; bargaining; fairness; communication; (follow links to similar papers)

JEL-Codes: C78; L14; (follow links to similar papers)

43 pages, February 17, 2000

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