Editing Hold-up problem (section)

=== Contractual  ===
Rogerson (1992) showed the existence of a first-best contractual solution to the hold-up problem in even extremely complex environments involving x agents with arbitrarily complex transaction decisions and utility functions. He shows that three important environmental assumptions must be made:

# No [[externalities]] so that the investment of each agent directly affects only its own type. Therefore, the following situation is not allowed: a situation where a seller's investment has influence on the quality of the product that he sells to the buyer.
# [[Risk neutrality]].
# Only one investor has partially private information so that only one agent makes an investment decision.

Furthermore, the solution also requires 'powerful' contracts to be written.

# Complex contracts can be written.
# Each party commits to participate so all parties are willing to sign the contract at the time of signing.
# The contract prevents from renegotiating the outcomes of the contract so that renegotiation in equilibrium is not possible.

According to Rogerson (1992) the hold-up problem does not necessarily create inefficiencies; when it does, one of the above requirements is not satisfied. The requirements are necessary to come to an absolutely best solution.<ref name=rogerson92/>

If there are direct externalities and renegotiation cannot be prevented, even under symmetric information, underinvestment cannot be avoided.<ref>{{Cite journal|title = The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)|journal = Econometrica|date = 2002|issn = 1468-0262|pages = 1–45|volume = 70|issue = 1|doi = 10.1111/1468-0262.t01-1-00268|first1 = Ilya|last1 = Segal|first2 = Michael D.|last2 = Whinston}}</ref> If there are direct externalities, the seller's investment is a hidden action and the buyer has private information about its valuation, the absolutely best solution may not be attained even when the parties have full commitment power.<ref>{{Cite journal|title = On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems|journal = Journal of Economic Theory|date = 2002|pages = 444–460|volume = 103|issue = 2|doi = 10.1006/jeth.2001.2790|first = Patrick W.|last = Schmitz|citeseerx = 10.1.1.584.1856}}</ref><ref>{{Cite journal|title = Subgame-Perfect Implementation Under Information Perturbations*|journal = The Quarterly Journal of Economics|issn = 0033-5533|pages = 1843|volume = 127|issue = 4|doi = 10.1093/qje/qjs026|first1 = Philippe|last1 = Aghion|first2 = Drew|last2 = Fudenberg|first3 = Richard|last3 = Holden|first4 = Takashi|last4 = Kunimoto|first5 = Olivier|last5 = Tercieux|year = 2012|citeseerx = 10.1.1.224.2883}}</ref> In the absence of direct externalities, simple contracts may solve the hold-up problem even when each party has private information about its valuation.<ref>{{Cite journal|title = Simple contracts, renegotiation under asymmetric information, and the hold-up problem|journal = European Economic Review|date = 2002|pages = 169–188|volume = 46|issue = 1|doi = 10.1016/S0014-2921(01)00088-5|first = Patrick W.|last = Schmitz|url = https://mpra.ub.uni-muenchen.de/12530/1/MPRA_paper_12530.pdf}}</ref> [[Eric Maskin|Maskin]] and [[Jean Tirole|Tirole]] (1999) argue that complex contracts can solve the hold-up problem when there are ex ante indescribable contingencies, and [[Oliver Hart (economist)|Hart]] and [[John Hardman Moore|Moore]] (1999) argue that the solution does not work when renegotiation cannot be ruled out.<ref>{{Cite journal|title = Unforeseen Contingencies and Incomplete Contracts|journal = The Review of Economic Studies|date = 1999|issn = 0034-6527|pages = 83–114|volume = 66|issue = 1|doi = 10.1111/1467-937X.00079|first1 = Eric|last1 = Maskin|first2 = Jean|last2 = Tirole}}</ref><ref>{{Cite journal|title = Foundations of Incomplete Contracts|journal = The Review of Economic Studies|date = 1999|issn = 0034-6527|pages = 115–138|volume = 66|issue = 1|doi = 10.1111/1467-937X.00080|first1 = Oliver|last1 = Hart|first2 = John|last2 = Moore|s2cid = 54504498|url = http://eprints.lse.ac.uk/19354/}}</ref> Taken together, whether or not suitable contracts can solve the hold-up problem is disputed in contract theory.<ref>{{Cite journal|title = Incomplete Contracts: Where do We Stand?|journal = Econometrica|date = 1999|issn = 1468-0262|pages = 741–781|volume = 67|issue = 4|doi = 10.1111/1468-0262.00052|first = Jean|last = Tirole|citeseerx = 10.1.1.465.9450}}</ref> In an experimental study, Hoppe and Schmitz (2011) found that option contracts may alleviate the hold-up problem even when renegotiation is possible, which may be explained by Hart and Moore's (2008) idea that contracts may serve as reference points.<ref>{{Cite journal|title = Can contracts solve the hold-up problem? Experimental evidence|journal = Games and Economic Behavior|date = 2011|pages = 186–199|volume = 73|issue = 1|doi = 10.1016/j.geb.2010.12.002|first1 = Eva I.|last1 = Hoppe|first2 = Patrick W.|last2 = Schmitz|s2cid = 7430522}}</ref><ref>{{Cite journal|title = Contracts as Reference Points|journal = The Quarterly Journal of Economics|date = 2008|issn = 0033-5533|pages = 1–48|volume = 123|issue = 1|doi = 10.1162/qjec.2008.123.1.1|first1 = Oliver|last1 = Hart|first2 = John|last2 = Moore|citeseerx = 10.1.1.486.3894}}</ref>