Equilibrium incentives and accumulation of relational skills in a dynamic model of hold up

We construct a dynamic model of Holdup by applying a framework in capital accumulation games, and derive the Markov perfect equilibrium of the game. Firmsf specific investments for the current period affect the relational skill (state variable) in the next period. Therefore, firms decide their individual investment levels taking into account their impact on strategic interactions from the next period onwards. By considering hypothetically the impact of firmsf current investment decisions in the next period only, and by ignoring subsequent periods, a useful understanding about the relationship between two-period and infinite horizon formulations can be gained. We also compare the equilibrium incentives in both two-period and infinite horizon formulations, and investigate the equilibrium comparative statics and its implications. Preliminary results related to this research were presented at the Econometric Society North American Winter Meeting, Washington D.C., January 2003 and at the Canadian Economic Theory Conference, Vancouver, Canada, May 2003. I would like to thank session participants for useful comments. I also wish to thank Stanford University and Harvard University for the stimulating academic environment and hospitality during my visiting scholarship in 2001-2003. Financial support for this research was provided through a Grant-in-Aid for Scientific Research by the Japan Society for the Promotion of Science (No. 17530192). Citation: Suzuki, Yutaka, (2006) "Equilibrium incentives and accumulation of relational skills in a dynamic model of hold up." Economics Bulletin, Vol. 12, No. 7 pp. 1-11 Submitted: July 29, 2006. Accepted: September 9, 2006. URL: http://economicsbulletin.vanderbilt.edu/2006/volume12/EB-06L10012A.pdf