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Optimal information transmission in a holdup problem


  • This article is based on Chapter 2 of my PhD dissertation at Northwestern University and has previously been circulated under the title “Information Transmission and Cooperative Investment.” I am very grateful to Asher Wolinsky and Alessandro Pavan for guidance and encouragement. I would also like to thank Gregory Pavlov, Kim-Sau Chung, Jeffrey Ely, Francesca Molinari, John Morgan, Arijit Mukherjee, Eugene Orlov, Itai Sher, and Michael Whinston, as well as the editor, David Martimort, and two anonymous referees for helpful comments. All errors are mine.


This article examines the optimal contract in a bilateral trade model with unobservable relationship-specific investment and renegotiation. In such a setting, a contract plays an additional role that it does not have in the standard holdup model, namely that of transmitting information between the parties. The article shows that a partial-disclosure contract may be optimal and describes the optimal contract. If the investment is cooperative and the information between the trading parties is asymmetric, the optimal contract generally cannot result in the first best, but dispensing with either of these assumptions makes the first-best achievable.