The Hold-Up Problem, Innovations, and Limited Liability

13 Pages Posted: 28 Sep 2012

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Date Written: July 2012

Abstract

An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power.

Keywords: hold-up problem, incomplete contracts, limited liability, research and development

JEL Classification: D86, L23, O31

Suggested Citation

Schmitz, Patrick W., The Hold-Up Problem, Innovations, and Limited Liability (July 2012). CEPR Discussion Paper No. DP9050. Available at SSRN: https://ssrn.com/abstract=2153501

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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