The Hold-Up Problem, Innovations, and Limited Liability
13 Pages Posted: 28 Sep 2012
Date Written: July 2012
Abstract
An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power.
Keywords: hold-up problem, incomplete contracts, limited liability, research and development
JEL Classification: D86, L23, O31
Suggested Citation: Suggested Citation
Schmitz, Patrick W., The Hold-Up Problem, Innovations, and Limited Liability (July 2012). CEPR Discussion Paper No. DP9050, Available at SSRN: https://ssrn.com/abstract=2153501
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