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Hold-Up and Durable Trading Opportunities

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  • Watson, Joel
  • Wignall, Chris

Abstract

This paper examines a contractual settingwith unverifiable investment and a durable trading opportunity, in which trade can take place in any one of an infinite number of periods. The contractual setting features cross-investment, meaning that the seller’s investment affects the buyer’s benefit of trade. The analysis shows that durability of the trading opportunity does not complicate the hold-up problem; more precisely, the set of outcomes supported in the durability setting is equivalent to the set supported in the related setting without durability. Thus, the technology of investment and trade— in particular, whether investment and trade actions are divided or unified (Buzard and Watson 2009)— plays an important role in determining whether the seller can be induced to invest at the efficient level. The issue of multiple equilibrium is analyzed and it is shown that particular non-stationary contracts can achieve unique implementation. The modeling exercise thus qualifies the recent view that durability may contribute to the hold-up problem

Suggested Citation

  • Watson, Joel & Wignall, Chris, 2009. "Hold-Up and Durable Trading Opportunities," University of California at San Diego, Economics Working Paper Series qt8p8284wg, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt8p8284wg
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    References listed on IDEAS

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    1. Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.

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