Finite Horizon Holdup and How to Cross the River

Simon Martin, Karl Schlag

When should one pay the ferryman? When should one pay for delivery of a good if there are no institutions or these are too costly to enforce contracts? We suggest to break up the transaction into many small rounds of investment and payment. We show that the efficient investment can be implemented in an
ε-subgame perfect equilibrium for any given ε if there are sufficiently many rounds of investment. This shows that when the horizon is finite, the holdup problem that emerges from backwards induction is not robust. Equilibria with stable and robust strategies require more periods.

Department of Economics
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Publication date
Austrian Fields of Science 2012
502047 Economic theory
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