Hold-up
Once one side has sunk money or effort it cannot recover, the other side can demand a bigger share of the gains.
Often misread asTreating hold-up as opportunistic behaviour to be defended against, so the analysis is about who grabbed what from whom.
How to see it
Once the investment is sunk, the bargaining restarts without it
Hold-up arises when one party makes an investment that is worth far more inside this particular relationship than outside it. Once the money is spent, the other party can reopen the terms, because the investor's outside option has become poor. Anticipating that, the investor puts in less than it should have, or nothing at all.
The checkLook for what was never built rather than for what was taken; the under-investment is the loss, and it happens before anyone misbehaves.
Try itA supplier is weighing up a machine that only makes parts your factory uses. Work out the price negotiation the day after the machine is installed, then ask whether the supplier buys it at all. If they do not, say precisely who lost what and when.
Games that show it
Know these first
Easily confused with
Sources
- Klein, B., Crawford, R. & Alchian, A. (1978). Journal of Law and Economics 21(2), 297-326.
- Williamson, O. (1985). The Free Press.