A Solution to the Hold-Up Problem Involving Gradual Investment
25 Pages Posted: 15 Jan 2003
Date Written: June 25, 2002
We consider a setting in which the buyer's ability to hold up a seller's investment is so severe that there is no investment in equilibrium of the static game typically analyzed. We show that there exists an equilibrium of a dynamic game generating positive investment. The seller makes a sequence of gradually smaller investments, each repaid by the buyer under the threat of losing further seller investment. As modeled frictions converge to zero, the equilibrium outcome converges to the first best. We draw connections between our work and the growing literature on gradualism in public good contribution games and bargaining games.
Keywords: hold-up problem, gradualism, incomplete contracts, investment, contribution games
JEL Classification: D23, C73, L14
Suggested Citation: Suggested Citation