Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/202363
Authors: 
Raskovich, Alexander
Year of Publication: 
2007
Series/Report no.: 
EAG Discussion Paper 07-13
Abstract: 
The holdup problem of under-investment in specific capital has been studied extensively. Less attention has been paid to the "holdout" problem of over-investment in outside options. A buyer's gain from (unverifiably) developing an outside option exceeds the joint gain, given rent shifting when an inferior option binds in subsequent bargaining with the seller. Long-term contracts can solve holdout by increasing the buyer's surplus from trade within the relationship. With a nonbinding contract, however, the seller's participation constraint may require the buyer (who may be financially constrained) to pay a large signing bonus. This suggests a novel motive for vertical integration.
Document Type: 
Working Paper

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