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Does Competition Solve the Hold-up Problem?

Author

Listed:
  • Leonardo Felli
  • Kevin Roberts
Abstract
In an environment in which both buyers and sellers can undertake match specific investments, the presence of market competition for matches may solve hold-up and coordination problems generated by the absence of complete contingent contracts. In particular, this paper shows that when matching is assortative and sellers' investments precede market competition then investments are constrained efficient. One equilibrium is efficient with efficient matches but also there can be equilibria with coordination failures. Different types of efficiency arise when buyers undertake investment before market competition. These inefficiencies lead to buyers' under-investment due to a hold-up problem but, when competition is at its peak, there is a unique equilibrium of the competition game with efficient matches - no coordination failures - and the aggregate hold-up inefficiency is small in a well defined sense, independent of market size.

Suggested Citation

  • Leonardo Felli & Kevin Roberts, 2001. "Does Competition Solve the Hold-up Problem?," STICERD - Theoretical Economics Paper Series 414, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:414
    as

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    File URL: https://sticerd.lse.ac.uk/dps/te/te414.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Competition; hold-up problem; matching; specific investments.;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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