Information and bargaining in the hold-up problem

This article incorporates an information structure with partial information into the canonical hold-up problem. The optimal information structure balances the tradeoff between ex ante efficiency (the information rent effect) and ex post efficiency (the bargaining disagreement effect). With one-shot bargaining, it occurs at an intermediate level of information asymmetry; when there is repeated bargaining, it is attained with perfect asymmetry. Asymmetric information, the parameter that is frequently ignored in the literature, turns out to be an important welfare instrument for the hold-up problem. Our results therefore provide a basis for institutional design regarding the optimal control of information flow. Copyright (c)2008, RAND.