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Holdups and overinvestment in capital markets

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  • Kurmann, André

Abstract

This paper considers a decentralized capital market characterized by trading frictions in which firms and suppliers need to make investment decisions before meeting with each other and bargaining over the price of capital. The resulting holdup problem provides firms with a strategic incentive to overaccumulate capital so as to reduce their marginal productivity and thus the bargained price. In equilibrium, this strategic incentive can outweigh the usual distortionary effects of holdup problems that on their own would lead to underinvestment, thus resulting in the economy to overinvest. In a setting with both capital and labor, the holdup problem in capital markets interacts with holdup problems in labor markets. This presents firms with a trade-off that has non-trivial equilibrium effects and that – depending on the substitutability of capital and labor and the firm's bargaining power in each market – can mitigate or exacerbate the overinvestment result.

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  • Kurmann, André, 2014. "Holdups and overinvestment in capital markets," Journal of Economic Theory, Elsevier, vol. 151(C), pages 88-113.
    • Handle: RePEc:eee:jetheo:v:151:y:2014:i:c:p:88-113
    DOI: 10.1016/j.jet.2014.02.004
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    Cited by:

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    3. Wei Cui & Randall Wright & Yu Zhu, 2022. "Endogenous Liquidity and Capital Reallocation," Staff Working Papers 22-27, Bank of Canada.
    4. Yujing Xu, 2022. "Unobservable investments, trade efficiency and search frictions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(2), pages 764-799, May.
    5. Marco Airaudo & María Pía Olivero, 2019. "Optimal Monetary Policy with Countercyclical Credit Spreads," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 787-829, June.
    6. Kurmann, André & Rabinovich, Stanislav, 2018. "Dynamic inefficiency in decentralized capital markets," Journal of Economic Theory, Elsevier, vol. 173(C), pages 231-256.
    7. Finkelstein Shapiro, Alan, 2018. "Labor force participation, interest rate shocks, and unemployment dynamics in emerging economies," Journal of Development Economics, Elsevier, vol. 133(C), pages 346-374.
    8. Alan Finkelstein Shapiro & Andres Gonzalez Gomez & Jessica Roldan-Pena & Victoria Nuguer, 2018. "Price Dynamics and the Financing Structure of Firms in Emerging Economies," 2018 Meeting Papers 339, Society for Economic Dynamics.

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    More about this item

    Keywords

    Holdup problems; Trading frictions; Bargaining; Investment;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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