A Solution to the Hold-Up Problem Involving Gradual Investment

25 Pages Posted: 15 Jan 2003

See all articles by Rohan Pitchford

Rohan Pitchford

University of Sydney Business School

Christopher M. Snyder

Dartmouth College - Department of Economics; National Bureau of Economic Research

Date Written: June 25, 2002

Abstract

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

Pitchford, Rohan and Snyder, Christopher M., A Solution to the Hold-Up Problem Involving Gradual Investment (June 25, 2002). Available at SSRN: https://ssrn.com/abstract=336461 or http://dx.doi.org/10.2139/ssrn.336461

Rohan Pitchford

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

National Bureau of Economic Research ( email )

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Cambridge, MA 02138
United States

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