The Value of Information in the Hold‐Up Problem

Thomas Pfeiffer

German Economic Review, 2004, vol. 5, issue 2, 177-203

Abstract: Abstract In the literature, the information structure of the hold‐up problem is typically assumed to be exogenous. In this paper, we introduce an additional stage at which the head office may grant individual divisions access to an information system before they undertake their specific investments. Although more information ceteris paribus enhances each divisions' profits, more information can reduce divisions' investments and destroy synergies for the other division that would have been generated by the investments. If this negative effect dominates, then information can be harmful for the entire company. Hence, information control can be a subtle force to deal with the hold‐up problem to a certain extent. In this paper we analyze those conditions under which information is either harmful or beneficial for central management.

Date: 2004
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