Does Competition Solve the Hold-Up Problem?

63 Pages Posted: 13 Oct 2002

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 2002

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 additional equilibria with coordination failures. Different types of inefficiency arise when sellers undertake investment before market competition. These inefficiencies lead to sellers' 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.

Keywords: Hold-up problem, competition, matching, specific investments

JEL Classification: C78, D43, D83

Suggested Citation

Felli, Leonardo and Roberts, Kevin W.S., Does Competition Solve the Hold-Up Problem? (September 2002). Available at SSRN: https://ssrn.com/abstract=339740

Leonardo Felli (Contact Author)

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Kevin W.S. Roberts

Nuffield College, Oxford ( email )

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