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Title: The hold-up problem, innovations, and limited liability

Author(s): Patrick W. Schmitz

Publication Date: July 2012

Keyword(s): hold-up problem, incomplete contracts, limited liability and research and development

Programme Area(s): Industrial Organization

Abstract: An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power.

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Bibliographic Reference

Schmitz, P. 2012. 'The hold-up problem, innovations, and limited liability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9050