 Competition with Nonexclusive Contracts: Tackling the Hold-Up ProblemThe B.E. Journal of Theoretical Economics, 2020, vol. 20, issue 2, 21 Abstract: In an environment in which a buyer and a seller make ex-ante investments, competition among sellers can solve the hold-up problem without the design of ex-ante contracts but, in the case of low levels of competition, this may lead to inefficient investments. This paper shows that a seller invests efficiently when each seller offers latent contracts designed to exclude any other seller from trade (i. e. most intense competition). Because competition among sellers allows the buyer to appropriate part of the gains from his investment, the hold-up problem vanishes for most of the buyer’s investment costs. However, the seller appropriates more than his marginal contribution to the gains from trade, and over-invests, when a group of sellers does not offer latent contracts (under less intense competition). Therefore, efficient investments can only be implemented when competition is at its most intense. Keywords: bilateral investment; hold-up; latent contracts (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejtec:v:20:y:2020:i:2:p:21:n:5 Ordering information: This journal article can be ordered from Access Statistics for this article The B.E. Journal of Theoretical Economics is currently edited by Burkhard C. Schipper More articles in The B.E. Journal of Theoretical Economics from De Gruyter |
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