Does Contract Enforcement Mitigate Holdup?*

J Anthony Cookson

The Review of Corporate Finance Studies, 2018, vol. 7, issue 2, 245-275

Abstract: This paper provides novel evidence that stronger contract enforcement mitigates holdup in business investment decisions using stark, externally imposed variation in contract enforcement across Native American reservations. My tests focus on the golf course industry. A high degree of sunk costs and long investment horizons in this industry make it naturally subject to the classical holdup problem. I find that state courts, which provide stronger contract enforcement than do tribal courts, lead to at least 27% more golf courses, with greater effects in areas with greater natural amenities. These findings suggest that courts play an important role in facilitating the oft-discussed contractual solutions to the holdup problem.Received November 13, 2017; editorial decision May 31, 2018 by Editor: Uday Rajan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2018
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