Hold Up Problem Beispiel

The hold up problem is central to the theory of incomplete contracts.

Hold up problem beispiel. We describe here the design of a simple teaching experiment that illustrates the hold up problem. A hold up problem arises when two factors are present. The hold up problem see hart 1995 results from situations where it is difficult to write complete contracts. The specific form of the optimal transaction cannot be determined with certainty beforehand.

It shows how the difficulty in writing complete contracts and the resulting need to renegotiate can lead to underinvestment. Parties to a future transaction must make noncontractible relationship specific investments before the transaction takes place. Manufacturers and suppliers often customize their equipment and production processes to the special needs of their partners knowing well that future re negotiation will confer part of the benefit from customization to their partners. A historic example of how the difficulty to judge quality and hence the difficulty to write contacts contingent on quality can lead to a hold up problem is provided in a recent paper by harrison and markevich 2007.

For instance workers and firms often invest in firm specific assets prior to negotiating for wages. The model used is a simple perfect information game. This problem known as hold up is inherent in many bilateral exchanges.