Government and the Reverse-Holdup Problem

9 Pages Posted: 11 Dec 2007

See all articles by Abraham L. Wickelgren

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

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Date Written: 2006-01-11

Abstract

When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to over pay for quality. In contrast to the standard holdup problem, this reverse-holdup problem can give the firm an incentive to over invest in non-contractible quality. The paper also discusses some examples where the reverse-holdup problem may explain excessive quality in government procurement.

Suggested Citation

Wickelgren, Abraham L., Government and the Reverse-Holdup Problem (2006-01-11). Journal of Public Economic Theory, Vol. 9, Issue 2, pp. 221-229, April 2007. Available at SSRN: https://ssrn.com/abstract=1066058 or http://dx.doi.org/10.1111/j.1467-9779.2007.00305.x

Abraham L. Wickelgren (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
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University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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