Hold-up and Sequential Specific Investments

Vladimir Smirnov and Andrew Wait ()

RAND Journal of Economics, 2004, vol. 35, issue 2, 386-400

Abstract: We explore the hold-up problem when parties can make investments simultaneously or sequentially. Sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. However, a cost of sequencing is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can prevent trade from occurring; this can be interpreted as a new form of hold-up. If both parties prefer to invest second, as the number of potential investment periods is increased, the subgame-perfect equilibrium can switch between a prisoners' dilemma and a coordination game.

Date: 2004
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