 Holdups and overinvestment in capital marketsJournal of Economic Theory, 2014, vol. 151, issue C, 88-113 Abstract: This paper considers a decentralized capital market characterized by trading frictions in which firms and suppliers need to make investment decisions before meeting with each other and bargaining over the price of capital. The resulting holdup problem provides firms with a strategic incentive to overaccumulate capital so as to reduce their marginal productivity and thus the bargained price. In equilibrium, this strategic incentive can outweigh the usual distortionary effects of holdup problems that on their own would lead to underinvestment, thus resulting in the economy to overinvest. In a setting with both capital and labor, the holdup problem in capital markets interacts with holdup problems in labor markets. This presents firms with a trade-off that has non-trivial equilibrium effects and that – depending on the substitutability of capital and labor and the firm's bargaining power in each market – can mitigate or exacerbate the overinvestment result. Keywords: Holdup problems; Trading frictions; Bargaining; Investment (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:eee:jetheo:v:151:y:2014:i:c:p:88-113 DOI: 10.1016/j.jet.2014.02.004 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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