Hold-Up, Asset Ownership, and Reference Points

43 Pages Posted: 24 Oct 2007 Last revised: 2 Jul 2010

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: October 2007

Abstract

We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.

Suggested Citation

Hart, Oliver D., Hold-Up, Asset Ownership, and Reference Points (October 2007). NBER Working Paper No. w13540, Available at SSRN: https://ssrn.com/abstract=1024143

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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European Corporate Governance Institute (ECGI) ( email )

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