Information and the Hold-Up Problem
نویسندگان
چکیده
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 hold-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. The authors would like to thank John Vickers, Lucy White, an editor, two referees, and seminar participants at Harvard University, Institut d’Economie Industrielle, IOfest, New York University, Oxford University, RMIT University, the University of California, Berkeley, and the 5th ZEW Conference on the Economics of Information and Communication Technologies for helpful comments and suggestions.
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