No Holdup in Dynamic Matching Markets

Abstract

In many settings, heterogenous agents make non-contractible investments before bargaining over both who matches with 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. Using a non-cooperative investment and bargaining game, we show that holdup need not be a problem in markets with dynamic entry---even if they are thin at every point in time. This provides non-cooperative foundations for the standard price-taking assumption in matching markets, and shows that intertemporal competition can perfectly substitute for intratemporal competition.

Keywords: Holdup; Noncooperative bargaining; intertemporal competition; dynamic entry; outside options.

JEL Classification: C72, C78, D40, D41