Working Paper: CEPR ID: DP7332
Authors: Helmut Bester
Abstract: This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first-best.
Keywords: holdup problem; investments; matching market
JEL Codes: C78; D23; D92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions (F12) | holdup problem (D86) |
| holdup problem (D86) | underinvestment among agents on the long side of the market (G24) |
| search frictions (F12) | underinvestment among agents on the long side of the market (G24) |
| diminishing market frictions (F12) | efficient investment levels (G31) |
| holdup problem (D86) | efficient investment levels (G31) |