Holdup and the Evolution of Bargaining Conventions
Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics
W. Bentley MacLeod
Columbia University - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
USC CLEO Research Paper No. C01-2; and USC Law and Economics Research Paper No. 01-14
As Posner (1997) has observed, when individuals in a relationship can commit to imposing costs upon each other then efficient behavior in the absence of law is possible. The question is whether efficient norms of behavior evolve endogenously in a population. We show that in a standard hold up model in which both parties make relationship specific investments the long run outcome of a stochastic adaptation process similar to Young's (1993) 'adaptive play' does not in general correspond to the efficient equilibria. As Grossman and Hart (1986) observe, institutions, such as firms, may be needed to improve the allocation of resources.
Number of Pages in PDF File: 25
Keywords: Hold up problem, bargaining, evolution
JEL Classification: C78, L41
Date posted: July 28, 2001
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