No Holdup in Dynamic Markets

28 Pages Posted: 4 Aug 2018

See all articles by Matthew Elliott

Matthew Elliott

Cambridge University

Eduard Talamàs

University of Pennsylvania

Date Written: July 28, 2018


Different types of agents make non-contractible investments before bargaining over both who matches to whom and the terms of trade. In thin markets, the holdup problem — that is, underinvestment caused by agents receiving only a fraction of the returns from their investments — is ubiquitous. However, we show that holdup is not a problem in markets that attract traders over time — even when only a few traders are present in the market at any point in time. In particular, we characterize the type-symmetric Markov perfect equilibria of a non-cooperative investment and bargaining game with sequential entry, and we show that — in every such equilibrium — all the agents receive the full returns from their marginal investments in the limit as they become patient. Intuitively, the option to wait for future market participants creates competition — so even apparently-thin markets can be competitive. This provides non-cooperative foundations for the standard price-taking assumption in the literature investigating investment efficiency in competitive matching markets.

Keywords: Holdup, Efficiency, Bargaining, Competition, Dynamic Entry, Outside Options

JEL Classification: C72, C78, D40, D41

Suggested Citation

Elliott, Matthew and Talamàs, Eduard, No Holdup in Dynamic Markets (July 28, 2018). Available at SSRN: or

Matthew Elliott (Contact Author)

Cambridge University ( email )

Faculty of Economics
Austin Robinson Building Sidgwick Avenue
Cambridge, CB39DD
United Kingdom

Eduard Talamàs

University of Pennsylvania ( email )

133 South 36th Street
Philadelphia, PA Philadelphia 19104
United States

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