Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships

Benjamin Klein

Economic Inquiry, 1996, vol. 34, issue 3, 444-63

Abstract: Court enforcement and private enforcement are not alternative contract enforcement mechanisms but are used jointly by transactors to define the self-enforcing range of a contractual relationship. Within this framework, contract terms economize on the limited amounts of private enforcement capital possessed by transactors, either by directly controlling transactor behavior or by shifting private enforcement capital between transactors to coincide with likely future market conditions. Hold-ups occur when market conditions change sufficiently to place the relationship outside the self-enforcing range. This probabilistic view of hold-ups is contrasted with opportunism more generally and with moral hazard behavior. Copyright 1996 by Oxford University Press.

Date: 1996
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