Government and the Reverse-Holdup Problem
9 Pages Posted: 19 Dec 2003
Date Written: November 2003
When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to "over pay" for quality. In contrast to the standard holdup problem, this reverse-holdup problem can give the firm an incentive to overinvest in non-contractible quality.
Keywords: holdup, non-contractible investment, government procurement
JEL Classification: D20, H00
Suggested Citation: Suggested Citation