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Does competition solve the hold-up problem?

Felli, Leonardo and Roberts, Kevin (2015) Does competition solve the hold-up problem? Economica. ISSN 0013-0427

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Identification Number: 10.1111/ecca.12170

Abstract

In an environment in which heterogeneous buyers and sellers undertake ex ante investments, the presence of market competition for matches provides incentives for investment but may leave inefficiencies, namely hold-up and coordination problems. This paper shows, using an explicitly non-cooperative model, that when matching is assortative and investments precede market competition, buyers' investments are constrained efficient while sellers marginally underinvest with respect to what would be constrained efficient. However, the overall extent of this inefficiency may be large. Multiple equilibria may arise; one equilibrium is characterized by efficient matches, but there can be additional equilibria with coordination failures.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2015 The London School of Economics and Political Science
Divisions: LSE
Subjects: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
Date Deposited: 09 Dec 2015 15:23
Last Modified: 20 Apr 2019 01:20
URI: http://eprints.lse.ac.uk/id/eprint/64641

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