Competition and Hold-ups∗

In an environment in which both workers and firms undertake match specific investments, the presence of market competition for matches may solve the hold-up problems generated by the absence of complete contingent contracts. In particular, this paper shows that in a world in which workers’ and firms’ investments are separated by market competition and contracts specify a simple (non-contingent) wage payment, investments are constrained efficient. Indeed, workers and firms invest efficiently given the equilibrium matches in which they are involved. ∗We thank Tim Besley, Jan Eeckhout, George Mailath, Kiminori Matsuyama, John Moore, Andy Postlewaite and seminar participants at the LSE for very helpful discussions and comments. Errors remain our own responsibility. Competition and Hold-ups 1