Government and the Reverse-Holdup Problem

Abraham L. Wickelgren

Journal of Public Economic Theory, 2007, vol. 9, issue 2, pages 221-229

Abstract: When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to "over pay" for quality. In contrast to the standard holdup problem, this reverse-holdup problem can give the firm an incentive to overinvest in non-contractible quality. The paper also discusses some examples where the reverse-holdup problem may explain excessive quality in government procurement. Copyright 2007 Blackwell Publishing, Inc..

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