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Information and the Hold-Up Problem

Benjamin Hermalin () and Michael Katz ()

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting old-up problem is affected by the seller’s information about the investing party’s likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. We establish conditions under which the seller’s ability to observe the buyer’s investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.

Date: 2009-03-30
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Journal Article: Information and the hold‐up problem (2009) Downloads
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