A Hold-Up Problem With Behavioral Considerations

31 Pages Posted: 15 Dec 2019 Last revised: 23 Mar 2020

See all articles by Ernan Haruvy

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management

Elena Katok

University of Texas at Dallas

Zhongwen Ma

affiliation not provided to SSRN

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 27, 2019

Abstract

Incomplete contracts may involve a hold-up problem, resulting in inefficient levels of investment. In this paper, we model the phenomenon as a sequential move game with asymmetric information regarding quality. Absence behavioral considerations, the unique Perfect Bayesian Equilibrium implies zero investment. However, with reciprocal motives, the hold-up problem may be mitigated due to vengeance as a credible threat. We propose a model that incorporates reciprocal motives, and solve for the vengeance equilibrium. In addition, we look at a nonbinding handshake as an alternative mechanism for mitigating the hold-up problem. This mechanism would work under the assumption of relationship norms entering the utility function. We incorporate relationship norms into the model and solve for the handshake equilibrium. Finally, we propose and conduct an experimental test to gauge the value of the analytical predictions in environments with human players.

Keywords: Dynamic Psychological Game; Hold-Up Problem; Incomplete Contract; Vengeance; Handshake

JEL Classification: C61, M11, M20, C70, D00

Suggested Citation

Haruvy, Ernan and Katok, Elena and Ma, Zhongwen and Sethi, Suresh, A Hold-Up Problem With Behavioral Considerations (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3494554 or http://dx.doi.org/10.2139/ssrn.3494554

Ernan Haruvy

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Elena Katok

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

Zhongwen Ma

affiliation not provided to SSRN

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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