Vladimir Smirnov and Andrew Wait

"Timing of investments, holdup and total welfare"
JEL codes: D23
Keywords: holdup, sequencing

Abstract: We explore holdup with simultaneous and sequential investment. With simultaneous investment both investors are held up. With sequential investment contracting becomes possible after the project has commenced, so the second investor avoids being held up. If the investments are independent sequential investment: increases costs of delay; reduces the incentive for the first player to invest; and increases the second player's incentive to invest. The paper shows the timing of investment can act as an additional form of holdup; if they have the option when to invest, a party may choose the regime that does not maximize total welfare.

Pre-publication pdf copy.