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The Hold-Up Problem with Flexible Unobservable Investments

Author

Listed:
  • Daniel Krähmer

    (Universität Bonn)

Abstract

The paper studies the canonical hold-up problem with one-sided investment by the buyer and full ex post bargaining power by the seller. The buyer can covertly choose any distribution of valuations at a cost and privately observes her valuation. The main result shows that in contrast to the well-understood case with linear costs, if investment costs are strictly convex in the buyer’s valuation distribution, the buyer’s equilibrium utility is strictly positive and to tal welfare is strictly higher than in the benchmark when valuations are public information, thus alleviating the hold-up problem. In fact, when costs are mean-based or display decreasing risk, the hold-up problem may disappear completely. Moreover, the buyer’s equilibrium utility and total welfare might be non-monotone in costs. The paper utilizes an equilibrium characterization in terms of the Gateaux derivative of the cost function.

Suggested Citation

  • Daniel Krähmer, 2024. "The Hold-Up Problem with Flexible Unobservable Investments," ECONtribute Discussion Papers Series 278, University of Bonn and University of Cologne, Germany.
  • Handle: RePEc:ajk:ajkdps:278
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_278_2024.pdf
    File Function: First version, 2024
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    References listed on IDEAS

    as
    1. Dilmé, Francesc, 2019. "Pre-trade private investments," Games and Economic Behavior, Elsevier, vol. 117(C), pages 98-119.
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    3. Gul, Faruk, 2001. "Unobservable Investment and the Hold-Up Problem," Econometrica, Econometric Society, vol. 69(2), pages 343-376, March.
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    6. Condorelli, Daniele & Szentes, Balázs, 2020. "Information design in the holdup problem," LSE Research Online Documents on Economics 90620, London School of Economics and Political Science, LSE Library.
    7. Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci, 2017. "Stochastic Dominance Analysis Without the Independence Axiom," Management Science, INFORMS, vol. 63(4), pages 1097-1109, April.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Information Design; Hold-Up Problem; Unobservable Information;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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