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Competition with Nonexclusive Contracts: Tackling the Hold-Up Problem

Author

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  • Roig Guillem

    (Faculty of Economics, Universidad Del Rosario, Bogota, Colombia)

Abstract

In an environment in which a buyer and a seller make ex-ante investments, competition among sellers can solve the hold-up problem without the design of ex-ante contracts but, in the case of low levels of competition, this may lead to inefficient investments. This paper shows that a seller invests efficiently when each seller offers latent contracts designed to exclude any other seller from trade (i. e. most intense competition). Because competition among sellers allows the buyer to appropriate part of the gains from his investment, the hold-up problem vanishes for most of the buyer’s investment costs. However, the seller appropriates more than his marginal contribution to the gains from trade, and over-invests, when a group of sellers does not offer latent contracts (under less intense competition). Therefore, efficient investments can only be implemented when competition is at its most intense.

Suggested Citation

  • Roig Guillem, 2020. "Competition with Nonexclusive Contracts: Tackling the Hold-Up Problem," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-21, June.
    • Handle: RePEc:bpj:bejtec:v:20:y:2020:i:2:p:21:n:5
    DOI: 10.1515/bejte-2018-0190
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    References listed on IDEAS

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    More about this item

    Keywords

    bilateral investment; hold-up; latent contracts;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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