Hold-Up Problems and Firm Formation

Hans Gersbach and Hans Haller

No 4688, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D20 D60 L20 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-ent and nep-mic
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