Hold-up (economics)

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In economics, hold-up is a situation that is described in New Institutional Economics , particularly in contract theory. In a hold-up situation, two contractual partners enter into a business relationship ex ante which usually obliges the seller to make investments. Since the asset to be exchanged cannot yet be fully described, neither the costs nor the willingness to pay can be determined ex ante. As a rule, therefore, only an incomplete contract is drawn up.

If the business partners meet again at the agreed time, the willingness to pay and the costs can be precisely determined. As a rule, an exchange occurs when the buyer's willingness to pay is higher than the cost of the goods. What matters is who has the bargaining power. If this lies with the buyer, the seller will not ex ante make the investments that would have maximized welfare. Hold-up problems, in general terms, describe situations in which information becomes apparent ex post and leads to the fact that the right incentives are not created ex ante.

The main cause of the hold-up is the incompleteness of the information that the contracting parties have about the possibilities, interests and intentions of the other. The risk of a hold-up exists above all if one partner is dependent on the services of the other (for example if a producer cannot switch to other suppliers) or if he has made specific investments trusting the partner's loyalty to the contract ( for example when a supplier has purchased special machines trusting acceptance commitments).

In order to cope with this problem, one can create a balance of interests by means of securities (sureties, demands for guarantees).

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