Investments and the Holdup Problem in a Matching Market Bester, Helmut

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Bester, Helmut
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The Journal of Mathematical Economics
Investments - Mathematical models.; Investments; Economics
To link to full-text access for this article, visit this link: Byline: Helmut Bester Abstract: This paper studies the properties of the steady state equilibrium in a bilateral matching market with ex ante investments at the market entry stage. Investment incentives depend on search frictions because both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem is more important for the long side of the market. In the extreme case of perfectly substitutable investments only the agents on the short side make investments. When market frictions become negligible, the market equilibrium approaches the Walrasian outcome. Article History: Received 3 March 2012; Revised 4 March 2013; Accepted 25 April 2013 Article Note: (footnote) [star] I wish to thank two referees, V. Bhaskar, Daniel Krahmer and Roland Strausz for discussions and helpful comments. Support by the German Science Foundation (DFG) through SFB/TR 15 is gratefully acknowledged.
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