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Information and the Hold-Up Problem

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  • Hermalin, Benjamin E.
  • Katz, Michael L

Abstract

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting old-up problem is affected by the seller’s information about the investing party’s likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. We establish conditions under which the seller’s ability to observe the buyer’s investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.

Suggested Citation

  • Hermalin, Benjamin E. & Katz, Michael L, 2009. "Information and the Hold-Up Problem," Department of Economics, Working Paper Series qt782315gb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt782315gb
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    2. Gherardo Girardi, 2013. "Second Sourcing with Capacity Constrained Firms and Locked-In Buyers," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(1), pages 83-95, February.
    3. Ismail Saglam, 2019. "The Effect of Awareness and Observability on the Non-contractible Investment of a Regulated Natural Monopoly," Journal of Industry, Competition and Trade, Springer, vol. 19(4), pages 617-639, December.
    4. Marina Halac, 2015. "Investing in a relationship," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 165-185, March.
    5. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    6. Dilmé, Francesc, 2019. "Pre-trade private investments," Games and Economic Behavior, Elsevier, vol. 117(C), pages 98-119.
    7. Atisha Ghosh & Ben Zissimos, 2021. "The Political Economy of Immigration, Investment, and Naturalization," Discussion Papers 2101, University of Exeter, Department of Economics.
    8. Jullien, Bruno & Sand-Zantman, Wilfried, 2018. "Internet regulation, two-sided pricing, and sponsored data," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 31-62.
    9. Aslan, Hadiye, 2020. "Shareholders versus stakeholders in investor activism: Value for whom?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    10. Jullien, Bruno & Sand-Zantman, Wilfried, 2014. "Pricing Internet Traffic: Exclusion, Signalling and Screening," CEPR Discussion Papers 9896, C.E.P.R. Discussion Papers.
    11. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.
    12. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    13. Yujing Xu, 2022. "Unobservable investments, trade efficiency and search frictions," Post-Print hal-03848827, HAL.
    14. Katz, Michael L., 2013. "Provider competition and healthcare quality: More bang for the buck?," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 612-625.

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