Using Formal and Informal Mechanisms to Limit Opportunism - Review and Classification of the Hold-Up Literature

Abstract

The hold-up problem has been the source of much investigation by fields ranging from economics to accounting. Despite contractual protection, firms and researchers are still looking for better remedies to hold-ups and searching for ways to encourage firms to make socially optimal specialized investments. In this study, I review and classify analytical and empirical research aimed at finding and testing mitigating mechanisms to hold-ups and I suggest avenues for future research. This research is organized around strategic decision-making with organizational design, trade decisions, and resource allocations. I find that analytical research has focused on formal mitigating mechanisms to hold-ups (i.e., integration, joint ownership, contracts, pricing mechanisms, incentives, and interdependence) and only recently complemented these formal safeguards with informal mechanisms in the form of relational contracting and private information. Empirical research has taken a different approach by focusing overwhelmingly on informal mechanisms. This review also shows that although hold-ups are likely to occur with intra-firm trade and resource allocations, these research streams have not pursued analytical and empirical investigations to the same extent as research on inter-firm trade. As a result, this review not only integrates the findings of the various research streams, but also provides suggestions for future research.