Hold-up and sequential specific investments

Vladimir Smirnov*, Andrew Wait

*Corresponding author for this work

Research output: Contribution to journalReview article

11 Citations (Scopus)

Abstract

We explore the hold-up problem when parties can make investments simultaneously or sequentially. Sequencing of investments can allow some projects to proceed that would not be feasible with a simultaneous regime. However, a cost of sequencing is that it can disadvantage some parties, reducing their incentive to invest. The mere possibility of sequential investment can prevent trade from occurring; this can be interpreted as a new form of hold-up. If both parties prefer to invest second, as the number of potential investment periods is increased, the subgame-perfect equilibrium can switch between a prisoners' dilemma and a coordination game.

Original languageEnglish
Pages (from-to)386-400
Number of pages15
JournalRAND Journal of Economics
Volume35
Issue number2
Publication statusPublished - Jun 2004

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    Smirnov, V., & Wait, A. (2004). Hold-up and sequential specific investments. RAND Journal of Economics, 35(2), 386-400.