Hold-Up Problems and Firm Formation

33 Pages Posted: 17 Dec 2004

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics

Date Written: October 2004

Abstract

Agents from a homogeneous population organize themselves into productive partnerships and are confronted with a hold-up problem when making relation-specific investments in those partnerships. The problem is mitigated if agents can leave a partnership in which they have invested, bear the costs yet forego the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.

Keywords: Hold-up problem, firm formation, reinvestment-proof equilibria, efficient firm structure

JEL Classification: D20, D60, L20

Suggested Citation

Gersbach, Hans and Haller, Hans H., Hold-Up Problems and Firm Formation (October 2004). CEPR Discussion Paper No. 4688. Available at SSRN: https://ssrn.com/abstract=637187

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

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IZA Institute of Labor Economics

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Germany

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

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United Kingdom

Hans H. Haller

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-7591 (Phone)
540-231-5097 (Fax)

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