'Hold-Up' in Negotiations Involving Specific Investments: An Experimental Investigation

20 Pages Posted: 20 Jan 2007

See all articles by José Roberto Antiqueira

José Roberto Antiqueira

Government of the Federative Republic of Brazil - Sao Paulo Office

Sylvia Saes

FEA-USP

Sérgio G. Lazzarini

Insper Institute of Education and Research

Date Written: January 2007

Abstract

Opportunistic behavior in contractual relations that require specific investments, commonly referred to as 'hold-up', has been employed in the literature as an argument to explain the existence of vertically integrated firms. However, many authors posit that this behavior can be avoided through reputation concerns or cooperative social norms. If hold-up can indeed be avoided through such implicit contracts, then the literature must find new, alternative mechanisms that could explain the occurrence of vertical integration in conditions involving specific investments. To examine this issue through a behavioral lens, we carried out an experiment in which pairs of buyers and sellers meet in two rounds of negotiations involving specific investments. The roles ascribed to the participants and the existence of asymmetric information involving their reservation values in the negotiation created hold-up hazards. Our experimental results indicate that the propensity to act opportunistically exists, but it is not so strong and frequent to make specific investments economically unattractive ex post. Thus, aligned with previous experimental studies, our results call for further refinements in received theories of the firm. Contrary to the implicit contract argument, our research also shows that hold-up was more frequent and intense with acquaintances than in the case of pairs who did not know each other prior to the experiment.

Keywords: hold-up, transaction cost economics, negotiation, specific investments

JEL Classification: C92, D23, L22

Suggested Citation

Antiqueira, José Roberto Moraes and Saes, Maria Sylvia Macchione and Lazzarini, Sérgio Giovanetti, 'Hold-Up' in Negotiations Involving Specific Investments: An Experimental Investigation (January 2007). Available at SSRN: https://ssrn.com/abstract=957790 or http://dx.doi.org/10.2139/ssrn.957790

José Roberto Moraes Antiqueira

Government of the Federative Republic of Brazil - Sao Paulo Office ( email )

Av. Paulista, 1804 - 4o andar
Sao Paulo, SP 01310-922
Brazil

Maria Sylvia Macchione Saes

FEA-USP ( email )

Av. Prof. Luciano Gualberto 908
São Paulo SP, São Paulo 05508-900
Brazil

Sérgio Giovanetti Lazzarini (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil
55-11-45042387 (Phone)

HOME PAGE: http://www.sergiolazzarini.insper.edu.br/indexelazza.html

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