Get access

HOLD-UP: WITH A VENGEANCE

Authors

  • MARTIN DUFWENBERG,

    1. Dufwenberg: Department of Economics, University of Arizona, Tucson, AZ 85721, and Department of Economics, University of Gothenburg, Sweden. Phone 520-626-1540, Fax 520-621-8450, E-mail martind@eller.arizona.edu
    Search for more papers by this author
  • ALEC SMITH,

    1. Smith: Division of Humanities and Social Sciences, California Institute of Technology, Pasadena CA 91125. Phone 626-395-5967, Fax 626-405-9841, E-mail acs@hss.caltech.edu
    Search for more papers by this author
  • MATT VAN ESSEN

    1. Van Essen: Department of Economics, Finance, and Legal Studies, University of Alabama, Tuscaloosa, AL. Phone 719-510-5502, Fax 205-348-0590, E-mail mjvanessen@cba.ua.edu
    Search for more papers by this author
    • We thank Gary Charness, Yan Chen, Jim Cox, Andrew Daughety, Tore Ellingsen, Ben Hermalin, Georg Kirchsteiger, Jennifer Reinganum, Uzi Segal, Joel Sobel, an anonymous referee, and participants of several seminars for helpful comments, and Bruce Willis and his 1995 team for inspiration for the title. Dufwenberg's research was supported by the NSF (grant # SES-0921929).


Abstract

When contracts are incomplete or unenforceable, inefficient levels of investment may occur because of hold-up. If individuals care for negative reciprocity, these problems may be reduced, as revenge becomes a credible threat. However, negative reciprocity has this effect only when the investor holds the rights of control of the investment proceeds. We explore this issue analytically, deriving predictions for hold-up games which differ as regards assignment of rights of control. We also test and support these predictions in an experiment. (JEL C72, C92, D23, L14)

Ancillary