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Faculty of Economics

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Elliott, M. and Talamàs, E.

No Holdup in Dynamic Markets

CWPE2070

Abstract: In many markets, heterogenous agents make non-contractible investments before bargaining over both who matches with whom and the terms of trade. In static markets, the holdup problem—that is, inefficient investments caused by agents receiving only a fraction of their returns—is ubiquitous. Markets are often dynamic, however, with agents entering over time. Taking a general non-cooperative investment and bargaining approach, we show that the holdup problem vanishes in markets with dynamic entry as agents become patient: While there is substantial wiggle room for bargaining to determine outcomes, every bargaining outcome gives everyone her marginal product.

Author links: Matthew Elliott  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2070.pdf