Working Paper: NBER ID: w13540
Authors: Oliver Hart
Abstract: We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.
Keywords: holdup problem; asset ownership; reference points; contractual relationships
JEL Codes: D23; D86; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Judicious allocation of asset ownership (G51) | Mitigate hold-up costs (D86) |
| Ownership of key assets (G32) | Increase outside value when inside value is high (D46) |
| Increased outside value (D46) | Reduce seller's ability to engage in hold-up (D86) |
| Hold-up (D86) | Deadweight losses (H21) |
| Rigid contracts (D86) | Conditions for renegotiation (D86) |
| Conditions for renegotiation (D86) | Lead to hold-up (D86) |