Does Evolution Solve the Hold-up Problem?

Tore Ellingsen and Jack Robles

No 358, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: The paper examines the theoretical foundations of the hold-up problem. At a first stage, one agent decides on the level of a relationship-specific investment. There is no contract, so at a second stage the agent must bargain with a trading partner over the surplus that the investment has generated. We show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept. In particular, we prove the following two results. (i) If bargaining proceeds according to the Nash demand game, any investment level is subgame perfect, but only efficient outcomes are stochastically stable. (ii) If bargaining proceeds according to the ultimatum game (with the trading partner as proposer), only the minimal investment level is subgame perfect, but any investment level is stochastically stable.

Keywords: Specific investments; opportunism; evolution; fairness (search for similar items in EconPapers)
JEL-codes: C78 L14 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2000-02-17
New Economics Papers: this item is included in nep-evo, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Does Evolution Solve the Hold-Up Problem? (2002)
Working Paper: Does Evolution Solve the Hold-up Problem (2000)
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