DP9050 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, research and development|
|JEL(s):||D86, L23, O31|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9050|
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.