Opportunism in Sequential Investment Settings: On Holdups and Holdouts

Thomas Miceli and Kathleen Segerson ()

No 2014-08, Working papers from University of Connecticut, Department of Economics

Abstract: The holdup and holdout problems arise in different contexts, but they share certain fundamental similarities that have not generally been recognized. In particular, both involve activities requiring an up-front, non-salvageable investment, and both require the investor to purchase an input, the price of which is determined by bargaining after the initial investment has been made. The effect of the up-front investment is to reduce the investor’s bargaining power with the seller of the input. The anticipation of the outcome of this bargaining creates a disincentive for the investor to undertake the project in the first place, causing some efficient projects to be foregone. Remedies for the two problems, though outwardly different, share features that reflect the common source of their inefficiency.

Keywords: Holdup problem; holdout problem; non-salvageable investments; eminent domain; contracts; vertical integration (search for similar items in EconPapers)
JEL-codes: D23 K11 L14 L23 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014-04
New Economics Papers: this item is included in nep-ger and nep-law
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