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A Dynamic Theory of Holdup

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Abstract
The holdup problem arises when parties negotiate to divide the surplus generated by their ex ante noncontractable investments. We study this problem in a model which, unlike the stylized static model, allows the parties to continue to invest until they agree on the terms of trade. These possible investment dynamics overturn the conventional wisdom dramatically. First, the holdup problem need not entail underinvestment-type inefficiencies when the parties are sufficiently patient. Second, inefficiencies can arise unambiguously, but the reason for their occurrence differs from the one recognized by the static model. This latter finding sheds new light on the design of contracts and organizations.

Suggested Citation

  • Yeon-Koo Che & Jozsef Sakovics, 2001. "A Dynamic Theory of Holdup," Edinburgh School of Economics Discussion Paper Series 74, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:74
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    References listed on IDEAS

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    Keywords

    investment; bargaining with an endogenous pie; contribution games;
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