Journal article
Holdups and overinvestment in capital markets
Journal of economic theory, v 151(1)
May 2014
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
This paper considers a decentralized capital market characterized by trading frictions in which firms and suppliers need to make investment decisions before meeting with each other and bargaining over the price of capital. The resulting holdup problem provides firms with a strategic incentive to overaccumulate capital so as to reduce their marginal productivity and thus the bargained price. In equilibrium, this strategic incentive can outweigh the usual distortionary effects of holdup problems that on their own would lead to underinvestment, thus resulting in the economy to overinvest. In a setting with both capital and labor, the holdup problem in capital markets interacts with holdup problems in labor markets. This presents firms with a trade-off that has non-trivial equilibrium effects and that – depending on the substitutability of capital and labor and the firm's bargaining power in each market – can mitigate or exacerbate the overinvestment result.
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Details
- Title
- Holdups and overinvestment in capital markets
- Creators
- André Kurmann - Drexel University
- Publication Details
- Journal of economic theory, v 151(1)
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000335099600004
- Scopus ID
- 2-s2.0-84897038281
- Other Identifier
- 991019168188504721
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- Web of Science research areas
- Economics