Does Competition Solve the Hold-Up Problem?

56 Pages Posted: 19 Feb 2001

See all articles by Leonardo Felli

Leonardo Felli

University of Cambridge; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Kevin W.S. Roberts

Nuffield College, Oxford

Date Written: July 2000

Abstract

In an environment in which both buyers and sellers can undertake match specific investments, the presence of market competition for matches may solve hold-up and coordination problems generated by the absence of complete contingent contracts. In particular, this paper shows that when matching is assortative and sellers? investments precede market competition then investments are constrained efficient. One equilibrium is efficient with efficient matches but also there can be equilibria with coordination failures. Different types of inefficiency arise when buyers undertake investment before market competition. These inefficiencies lead to buyers? under-investments due to a hold-up problem but, when competition is at its peak, there is a unique equilibrium of the competition game with efficient matches; no coordination failures; and the aggregate hold-up inefficiency is small in a well defined sense independent of market size.

JEL Classification: D43, D83

Suggested Citation

Felli, Leonardo and Roberts, Kevin W.S., Does Competition Solve the Hold-Up Problem? (July 2000). Available at SSRN: https://ssrn.com/abstract=260741 or http://dx.doi.org/10.2139/ssrn.260741

Leonardo Felli (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kevin W.S. Roberts

Nuffield College, Oxford ( email )

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Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 601 (Phone)
+44 1865 278 557 (Fax)

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