“Can Contracts Solve the Hold-Up Problem?”

This week, we are adding “Can Contracts Solve the Hold-Up Problem?” by Eva Hoppe and Patrick Schmitz (Games and Economic Behavior 2011).

The paper is available on the site of the journal, and the game is in the “industrial organization section” on our site.




Abstract of the paper:

In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem, in particular when renegotiation cannot be prevented. Ultimately, this question has to be answered empirically. As a first step, we have conducted a laboratory experiment with 960 participants. We consider investments that directly benefit the non-investing party. While according to standard theory, contracting would be useless if renegotiation cannot be ruled out, we find that option contracts significantly improve investment incentives compared to a no-contract treatment. This finding might be attributed to Hart and Mooreʼs (2008) recent idea that contracts can serve as reference points.”

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