Split it up to create incentives: Investment, public goods and crossing the river

Simon Martin and Karl Schlag

Journal of Economic Theory, 2020, vol. 189, issue C

Abstract: When should one pay the ferryman? When to pay for the delivery of a good, and how should one invest in a public good if there is a single transaction and institutions are costly? We show how to solve the hold-up problem. The idea is to appropriately split up the desired total contribution into several separate contributions that are made in sequence, with each party threatening to discontinue if others deviate. Our solution concept is based on subgame perfection, where players are either selfish and do not care about very small gains or are socially minded as long as there is no deviation.

Keywords: Hold-up problem; ε-subgame perfect equilibrium; Finite horizon; Enforcement without contracts; Gradualism (search for similar items in EconPapers)
JEL-codes: C72 D23 L14 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:189:y:2020:i:c:s0022053120300867

DOI: 10.1016/j.jet.2020.105092

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