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Hold-Up Problem

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Investments are often geared towards a particular trading relationship, in which case the returns on them within the relationship exceed those outside it. Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges. For instance, workers and firms often invest in firm-specific assets prior to negotiating for wages. Manufacturers and suppliers often customize their equipment and production processes to the special needs of their partners, knowing well that future (re)negotiation will confer part of the benefit from customization to their partners. Clearly, the risk of the investor being held up discourages him or her from making socially desirable investments.

We first describe a simple model of hold up and illustrate the main underinvestment hypothesis (see Grout 1984, and Tirole 1986, for the first formal proof). A buyer and a seller, denoted B and S, can trade quantity \(...

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  1. http://link.springer.com/referencework/10.1057/978-1-349-95189-5

    Yeon-Koo Che & József Sákovics

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  2. József Sákovics
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Che, YK., Sákovics, J. (2018). Hold-Up Problem. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2120

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