How can the problem of hold up be mitigated?

However, with social preferences, the hold-up problem may be mitigated. We propose a model that incorporates social preferences and random errors, and solve for the equilibrium. We conduct laboratory experiments with human subjects and find that a model with social preferences and random errors organizes our data well.

What are the conditions that can give rise to a hold-up problem?

The hold-up problem (see Hart, 1995) results from situations where it is difficult to write complete contracts. When one party has made a prior commitment to a relationship with another party, the latter can ‘hold up’ the former for the value of that commitment.

What is hold up in an alliance?

Hold-up – one firm makes more transaction-specific investments in an exchange than partner firms make and the firm that has not made these investments tries to exploit the firm that has made the investments. Describe the conditions under which a strategic alliance can be rare and costly to directly duplicate.

What is a post investment hold up?

Hold-up arises when part of the return on an agent’s relationship-specific investments is ex post expropriable by his trading partner. Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges.

Can contracts solve the hold-up problem?

The option contract is an effective remedy for the hold-up problem; i.e., in the OC treatment we will observe more high investments than in the NC+ and in the FP treatment.

What does relationship Specific mean?

Asset Specificity in Detail As noted earlier, a relationship specific investment is an investment which once made (sunk) by one or both parties to an ongoing trading relationship has a lower value in alternative uses than it has in the intended use supporting this specific bilateral trading relationship.

What is the underinvestment problem?

Key Takeaways. The underinvestment problem describes a conundrum whereby a company becomes so overleveraged that it can no longer make investments in growth opportunities. Economists recognize this situation as an agency problem that can arise between a firm’s debt holders and equity shareholders.

What is relationship specific investment?

As noted earlier, a relationship specific investment is an investment which once made (sunk) by one or both parties to an ongoing trading relationship has a lower value in alternative uses than it has in the intended use supporting this specific bilateral trading relationship.

What does holdup mean when cheating in an alliance?

In an alliance a holdup occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than what the partners agreed to when they created the alliance.

What is sunk cost?

sunk cost, in economics and finance, a cost that has already been incurred and that cannot be recovered. In economic decision making, sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project.

Can contracts solve the hold-up problem experimental evidence?

A rigid contract specifies a price at which trade will occur. In particular, to the best of our knowledge, there is not yet any experimental evidence that option contracts may serve as reference points and thereby help to mitigate the hold-up problem.

What is hold-up in strategy?

The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits.

What are the solutions to the hold-up problem?

The organization and governance structure of a firm might be seen as a mechanism for dealing with a hold-up problem. A solution to the hold-up problem is vertical integration such as a merger in which all parts of the body are being produced internally rather than outside.

What is the hold up problem in economics?

In economics, the hold-up problem (or commitment problem) is central to the theory of incomplete contracts, and shows the difficulty in writing complete contracts. A hold-up problem arises when two factors are present:

Does the hold-up problem lead to underinvestment in relation to investment?

The hold-up problem leads to severe economic cost and might also lead to underinvestment. It is often argued that the possibility of a hold-up can lead to underinvestment in relation-specific investment and thus inefficiency.

What is hold-up in trading?

Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges. For instance, workers and firms often invest in firm-specific assets prior to negotiating for wages.