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Unobservable Investment and the Hold-Up Problem

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  • F. Gul
Abstract
We study a two-person bargaining problem in which the buyer may invest and increase his valuation of the object before bargaining. We show that if all offers are made by the seller and the time between offers is small, then the buyer invests efficiently and the seller extracts all of the surplus. Hence, bargaining with frequently repeated offers remedies the hold-up problem even when the agent who makes the relation-specific investment has no bargaining power and contracting is not possible. We consider alternative formulations with uncertain gains from trade or two-sided investment.
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Suggested Citation

  • F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
    • Handle: RePEc:wop:prinet:00s10
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    1. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-1753, November.
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