Investment and the Holdup Problem in a Matching Market

Helmut Bester

No 263, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper studies investment incentives in the steady state of a dynamic bi- lateral matching market. Because of search frictions, both parties in a match are partially locked–in when they bargain over the joint surplus from their sunk invest- ments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homoge- nous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first–best.

Keywords: Holdup Problem; Matching Market; Investments (search for similar items in EconPapers)
JEL-codes: C78 D23 D92 (search for similar items in EconPapers)
Date: 2009-07
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Related works:
Working Paper: Investments and the holdup problem in a matching market (2009)
Working Paper: Investments and the Holdup Problem in a Matching Market (2009)
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