Solving a hold-up problem may harm all firms: downstream R&D and transport-price contracts
Kazuhiro Takauchi and
Tomomichi Mizuno ()
No 1707, Discussion Papers from Graduate School of Economics, Kobe University
In vertical relations, by raising input price after downstream research and development (R&D) investment, upstream firms can extract the R&D benefit and have an incentive to set higher input price. As downstream firms underinvest for fear of this hold-up by upstream firms, outputs and input-demand shrink, and all firms become worse off. Previous literature emphasizes that a fixed-price contract in which upstream firms first commit themselves to input prices and downstream firms subsequently invest can resolve the hold-up problem and make all firms better off. By contrast, we show that in a vertical relation between firm-specific carriers and exporters, the fixed-price contract of transport price can make all firms worse off because an efficiency improvement in exporters intensifies inter-regional competition. We also discuss the robustness of the result.
Keywords: Transport-price contracts; Downstream R&D; Firm-specific carrier; Hold-up problem (search for similar items in EconPapers)
JEL-codes: L13 F12 O31 R40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-ino and nep-mic
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Journal Article: Solving a hold-up problem may harm all firms: Downstream R&D and transport-price contracts (2019)
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