The Hold-Up Problem in a Repeated Relationship
Marco A. Castaneda
International Journal of Industrial Organization, Vol. 24, No. 5, 2006
Much of the literature on what determines the scope of operations of a producer has centered on the ``hold-up problem". The standard results indicate the hold-up problem may lead to suboptimal investments, and therefore integration may improve the organization of production. In this paper, we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium. The equilibrium contract is non-exclusive, in order to allow the buyer to choose integration in later periods. We derive this result in the presence of very simple and incomplete contracts.
Keywords: incomplete contracts, outside options, vertical integration
JEL Classification: D23, L22Accepted Paper Series
Date posted: March 30, 2008
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