ECON 4180 Lecture Notes - Lecture 11: Extensive-Form Game, Human Capital
28 Mar 2016
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Document Summary
Suppose that the success of a particular project relies on an investment by person a as well as on the productive input of person b. The project requires person a to make the investment rst; only later does person b come onto the scene. The key problem is person a"s investment incentives, for she can gain the returns of her investment only by contracting with person b later. Hold-up problem, because b extracts part of the returns under the threat of holding up production. We can draw the extensive form of the game between jd and brynn in the text chapter 21. This illustrates the general phenomenon known as the hold-up problem. Key aspects of the hold-up story are that (1) investments are unveri able, so the court cannot condition transfers directly on these actions, and (2) there is some barrier to the parties writing a comprehensive contract prior to choosing investments.
