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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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    3. Yujing Xu, 2022. "Unobservable investments, trade efficiency and search frictions," Post-Print hal-03848827, HAL.
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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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