The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Hold-Up Problem

  • Yeon-Koo Che
  • József Sákovics
Reference work entry

Investments are often geared towards a particular trading relationship, in which case the returns on them within the relationship exceed those outside it. Once such an investment is sunk, the investor has to share the gross returns with her trading partner. This problem, known as hold-up, is inherent in many bilateral exchanges. For instance, workers and firms often invest in firm-specific assets prior to negotiating for wages. 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. Clearly, the risk of the investor being held up discourages him or her from making socially desirable investments.

We first describe a simple model of hold up and illustrate the main underinvestment hypothesis (see Grout 1984, and Tirole 1986, for the first formal proof). A buyer and a seller, denoted B and S, can trade quantity \(...


Bargaining Coase theorem Contract failure Fixed-price contracts Hold-up Incomplete contracts Ownership structures Relationship-specific investment Risk neutrality Underinvestment hypothesis Vertical integration 

JEL Classifications

C78 D4 D83 C70 D23 K12 L14 L22 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Yeon-Koo Che
    • 1
  • József Sákovics
    • 1
  1. 1.