- Hold-up problem
The hold-up problem is a term used in
economics to describe a situation where two parties (such as a supplier and a manufacturer) may be able to work most efficiently by cooperating, but refrain from doing so due to concerns that they may give the other party increasedbargaining power , and thereby reduce their own profits.For example: Imagine a scenario where profit can be made if agents X and Y work together, so they form an agreement to do so, after X buys the necessary equipment. The hold-up problem occurs when X might not be willing to accept that agreement, even though the outcome would be
Pareto efficient , because after X buys the necessary equipment, Y would have bargaining power and might decide to demand a larger proportion of the profits than before. The source of Y's power lies in X's investment. Since X is now deeply invested in the project, but Y is not, X stands to lose money, should the deal not be completed, but Y has no such risk. Thus, Y has some bargaining power that did not exist before X's investment. In the extreme, Y could demand 100% of the profits, if X's only alternative is to lose the initial investment entirely.One way to avoid the hold-up problem is for the firms to merge, a tactic known as
vertical integration , or to entervertical agreement s, e.g. an agreement with anon-compete clause .ee also
*
Specific asset
*Vertical monopoly
*game theory References
*Luis M. B. Cabral: "Introduction to Industrial Organisation", Massachusetts Institute of Technology Press, 2000.
*Williamson, Oliver. "Transactions-Cost Economics: The Governance of Contractual Relations." "Journal of Law and Economics", October 1979, 22(2), pp. 233-62.
*Williamson, Oliver. "Credible Commitments: Using Hostages to Support Exchange." "American Economic Review", September 1983, 73(4), pp. 519-40.
*Rogerson, William. "Contractual Solutions to the Hold-Up Problem." "Review of Economic Studies", October 1992, 59(4), pp. 774-94.
*Edlin, Aaron and Reichelstein, Stefan. "Holdups, Standard Breach Remedies, and Optimal Investment." "American Economic Review", June 1996 86(3), pp. 478-501
Wikimedia Foundation. 2010.