Relationship-specific investment and hold-up problems in supply chains: theory and experiments
Ernan Haruvy (),
Elena Katok (),
Zhongwen Ma () and
Suresh Sethi ()
Additional contact information
Ernan Haruvy: University of Texas at Dallas
Zhongwen Ma: University of Texas at Dallas
Business Research, 2019, vol. 12, issue 1, No 4, 45-74
Abstract Supply chains today routinely use third parties for many strategic activities, such as manufacturing, R&D, or software development. These activities often include relationship-specific investment on the part of the vendor, while final outcomes can be uncertain. Therefore, writing complete contracts for such arrangements is often not feasible, but incomplete contracts, especially when relationship-specific investment is required, may leave the supplier vulnerable to a version of the “hold-up problem,” which is known to result in sub-optimal levels of investment. We model the phenomenon as a sequential move game with asymmetric information. Absent behavioral considerations, the unique Perfect Bayesian Equilibrium implies zero investment. However, with social preferences, the hold-up problem may be mitigated. We propose a model that incorporates social preferences and random errors, and solve for the equilibrium. In addition, we look at reputation and find it to be effective for increasing investment. We conduct laboratory experiments with human subjects and find that a model with social preferences and random errors organizes our data well.
Keywords: Supply chain contracts; Behavioral economics; Game theory (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s40685-018-0068-0 Abstract (text/html)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:spr:busres:v:12:y:2019:i:1:d:10.1007_s40685-018-0068-0
Ordering information: This journal article can be ordered from
Access Statistics for this article
Business Research is currently edited by Thomas Gehrig
More articles in Business Research from Springer, German Academic Association for Business Research Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla ().