Template-Type: ReDIF-Paper 1.0
Title: The hold-up problem with flexible unobservable investments
Author-Name: Daniel Krähmer
Author-Email: kraehmer@hcm.uni-bonn.d
Classification-JEL: C61, D42, D82
Keywords: Information Design, Hold-Up Problem, Unobservable Information

Abstract: The paper studies the canonical hold-up problem with one-sided investment by the buyer
and full ex post bargaining power by the seller. The buyer can covertly choose any distribution
of valuations at a cost and privately observes her valuation. The main result shows that in
contrast to the well-understood case with linear costs, if investment costs are strictly convex
in the buyer’s valuation distribution, the buyer’s equilibrium utility is strictly positive and to-
tal welfare is strictly higher than in the benchmark when valuations are public information,
thus alleviating the hold-up problem. In fact, when costs are mean-based or display decreas-
ing risk, the hold-up problem may disappear completely. Moreover, the buyer’s equilibrium
utility and total welfare might be non-monotone in costs. The paper utilizes an equilibrium
characterization in terms of the Gateaux derivative of the cost function.

Note: 
Length: 37
Creation-Date: 2024-04
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp523
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_523