Does Evolution Solve the Hold-Up Problem?

Games and Economic Behaviour, Vol. 39, pp. 28-53, 2002

Posted: 27 Jan 2010

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Jack Robles

Victoria University of Wellington - School of Economics & Finance

Date Written: 2002

Abstract

The paper examines the theoretical foundations of the hold-up problem. At the first stage, one agent decides on the level of a relationship-specific investment. There is no contract, so at the second stage the agent must bargain with a trading partner over the surplus that the investment has generated. We show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept. In particular, we prove the following two results: (i) If bargaining proceeds according to the Nash demand game, any investment level is subgame perfect, but only a particular efficient outcome is stochastically stable. (ii) If bargaining proceeds according to the ultimatum game (with the trading partner as proposer), only the minimal investment level is subgame perfect, but any investment level is stochastically stable.

Keywords: Evolution, Hold-Up problem, Agent, Investment, Contract, Barganing, Nash demand, Ultimatum game

JEL Classification: L14, C78

Suggested Citation

Ellingsen, Tore and Robles, Jack, Does Evolution Solve the Hold-Up Problem? (2002). Games and Economic Behaviour, Vol. 39, pp. 28-53, 2002, Available at SSRN: https://ssrn.com/abstract=1542932

Tore Ellingsen

Stockholm School of Economics - Department of Economics ( email )

P.O. Box 6501
Sveavagen 65
S-113 83 Stockholm
Sweden
+46 8 736 9260 (Phone)
+46 8 31 3207 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Jack Robles (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
317
PlumX Metrics