Split it up to create incentives: Investment, public goods and crossing the river

When should one pay the ferryman? When to pay for the delivery of a good, and how should one invest in a public good if there is a single transaction and institutions are costly? We show how to solve the hold-up problem. The idea is to appropriately split up the desired total contribution into sever...

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Bibliographic Details
Published in:Journal of economic theory 2020-09, Vol.189, p.105092, Article 105092
Main Authors: Martin, Simon, Schlag, Karl H.
Format: Article
Language:English
Subjects:
Enforcement without contracts
Finite horizon
Gradualism
Hold-up problem
ε-subgame perfect equilibrium
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Summary:When should one pay the ferryman? When to pay for the delivery of a good, and how should one invest in a public good if there is a single transaction and institutions are costly? We show how to solve the hold-up problem. The idea is to appropriately split up the desired total contribution into several separate contributions that are made in sequence, with each party threatening to discontinue if others deviate. Our solution concept is based on subgame perfection, where players are either selfish and do not care about very small gains or are socially minded as long as there is no deviation.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2020.105092