The hold-up problem with flexible unobservable investments

Daniel Krähmer ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: The paper studies the canonical hold-up problem with one-sided investment by the buyer and full ex post bargaining power by the seller. The buyer can covertly choose any distribution of valuations at a cost and privately observes her valuation. The main result shows that in contrast to the well-understood case with linear costs, if investment costs are strictly convex in the buyer’s valuation distribution, the buyer’s equilibrium utility is strictly positive and to- tal welfare is strictly higher than in the benchmark when valuations are public information, thus alleviating the hold-up problem. In fact, when costs are mean-based or display decreas- ing risk, the hold-up problem may disappear completely. Moreover, the buyer’s equilibrium utility and total welfare might be non-monotone in costs. The paper utilizes an equilibrium characterization in terms of the Gateaux derivative of the cost function.

Keywords: Information Design; Hold-Up Problem; Unobservable Information (search for similar items in EconPapers)
JEL-codes: C61 D42 D82 (search for similar items in EconPapers)
Pages: 37
Date: 2024-04
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth, nep-mic, nep-reg and nep-upt
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