Hold-up, Asset Ownership, and Reference Points

Oliver D. Hart

No 13540, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.

JEL-codes: D23 D86 K12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-exp and nep-law
Date: 2007-10
Note: CF LE
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