Editing Hold-up problem (section)

{{Short description|Economic dilemma}}
{{Use American English|date = February 2019}}
{{Use dmy dates|date=May 2020}}
{{Marketing}}

In [[economics]], the '''hold-up problem''' is central to the theory of [[incomplete contracts]], and shows the difficulty in writing complete contracts. A hold-up problem arises when two factors are present:

# Parties to a future [[Rational economic exchange|transaction]] must make noncontractible relationship-specific investments before the transaction takes place. 
# The specific form of the optimal transaction (such as quality-level specifications, time of delivery, what quantity of units) cannot be determined with certainty beforehand.<ref name=rogerson92>Rogerson, W.P. (1992). Contractual Solutions to the Hold-Up Problem. ''The Review of Economic Studies, 4''(59), 777-793. {{JSTOR|2297997}}</ref>

The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits. When party A has made a prior commitment to a relationship with party B, the latter can 'hold up' the former for the value of that commitment. The hold-up problem leads to severe [[economic cost]] and might also lead to underinvestment.