Editing Hold-up problem (section)

=== Vertical integration ===
{{main|Vertical integration}}

The organization and governance structure of a firm might be seen as a mechanism for dealing with a hold-up problem. A solution to the hold-up problem is [[vertical integration]] such as a [[merger]] in which all parts of the body are being produced internally rather than outside.<ref>Holmström, B., & Roberts, J. (1998). The Boundaries of the Firm Revisited. ''The Journal of Economic Perspectives, 4''(12), 73-94. {{JSTOR|2646895}}</ref> Vertical integration shifts the ownership of the organizational asset of the firm and therewith creates more flexibility and avoids potential of a hold-up. In that way, the (transaction) costs associated with contractually induced hold-ups are saved and also the costs associated with the number of contracts written and executed. Hold-up problems are created from the existence of firm-specific investments, but also from the set of long-term contracts that are used in the presence of the certain investments. Whether a vertical integration is adopted as a solution to the hold-up problem depends on the magnitude of the specific investment and the ability to write long-term contracts, flexible enough to avoid a potential hold-up. However, the ability to write flexible long-term contracts strongly depends upon the underlying market uncertainty and the reputation of the company. Therefore, those factors will also influence the likelihood of vertical integration.<ref>Klein, B. (1998). Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited. ''Journal of Law, Economics, and Organization, 1''(4), 199-213. Retrieved from http://www.heinonline.org/HOL/Page?page=199&handle=hein.journals%2Fjleo4&collection=journals#207</ref> The extent to which vertical integration can alleviate the hold-up problem also depends on the information structure. While traditional incomplete contracting models of vertical integration such as [[Sanford J. Grossman|Grossman]] and [[Oliver Hart (economist)|Hart]] (1986) assume symmetric information, Schmitz (2006) has extended the incomplete contracting framework to allow for asymmetric information.<ref>{{Cite journal|title = The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration|journal = Journal of Political Economy|volume = 94|issue = 4|pages = 691|doi = 10.1086/261404|first1 = Sanford J.|last1 = Grossman|first2 = Oliver D.|last2 = Hart|date = 1986|url = https://dash.harvard.edu/bitstream/handle/1/3450060/Hart_CostsBenefits.pdf?sequence=4}}</ref><ref>{{Cite journal|title = Information Gathering, Transaction Costs, and the Property Rights Approach|journal = American Economic Review|date = 2006|issn = 0002-8282|pages = 422–434|volume = 96|issue = 1|doi = 10.1257/000282806776157722|first = Patrick W|last = Schmitz|s2cid = 154717219}}</ref>