Specific investment and supplier vulnerability

Zhiqi Chen and Xiaoqiao Wang

Economics Letters, 2017, vol. 151, issue C, 16-18

Abstract: Apart from the familiar holdup problem, we investigate another implication of specific investment that has not been examined systematically in the literature. That is, the presence of specific investment can make a supplier vulnerable to large negative shocks to its customer’s business. We demonstrate that this vulnerability causes the supplier to under-invest and a larger volatility in the customer’s business exacerbates the supplier’s under-investment. More surprisingly, a higher degree of specificity may induce the supplier to invest more, rather than less, in the specific asset.

Keywords: Specific investment; Holdup problem; Supplier vulnerability (search for similar items in EconPapers)
JEL-codes: L14 L20 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:151:y:2017:i:c:p:16-18

DOI: 10.1016/j.econlet.2016.11.033

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