ECONOMICS
& FINANCE WORKSHOP
Discussion
Paper Series
The Hold-Up Problem in Settings with
a Durable Trading Opportunity
By
Joel WATSON
Department of Economics
University of California, San Diego
And
Chris WIGNALL
Department of Economics
University of California, San Diego
Abstract
We examine a contractual setting with unverifiable investment and a
durable trading opportunity, where trade can take place in any one of
an infinite number of periods. We compare this setting with one in which
the opportunity to trade is nondurable and we show that the outcomes
supported in the nondurability setting can also be supported in the
durability setting. Thus, durability does not contribute to the hold-up
problem in the environment we study, contrary to the message of the
recent literature. In our class of examples, simple open-ended option
contracts suffice to induce efficient investment. Furthermore, unique
implementation is achieved with a specific nonstationary option contract.
Our model also allows us to clarify (in fact, discount) the role of
the “outside option principle” in the analysis of contractual
relationships.
Correspondence
Address:
Prof.
Joel WATSON
Department of Economics
University of California, San Diego
9500 Gilman Drive
La Jolla, CA 92093-0508
U.S.A.
