Using Formal and Informal Controls to Limit Opportunism : Review and Classification of Remedies to Hold-Ups

The hold-up problem, a form of opportunism, has been the subject of much investigation by researchers in fields such as economics or accounting. Despite contractual protections, hold-ups still occur, and firms and researchers continue to search for ways to avoid them and to encourage firms to make investments that are socially optimal and specific to the relationship at hand. In this paper, I review, synthesize, and classify analytical and empirical research aimed at identifying and testing formal and informal hold-up mitigating mechanisms, as well as suggest avenues for future research. My study integrates various streams of research and is organized around strategic decision-making, that is, decisions about organizational design, inter- and intra-firm trade, and resource allocation. I find that most analytical research has focused on formal controls to hold-ups such as vertical integration, joint ownership, contracts, pricing mechanisms, compensation, and interdependence, and has only recently begun to complement these formal controls with informal substitutes for commitment such as relational contracting and information asymmetry. Empirical research, on the other hand, has focused overwhelmingly on informal controls. As this review reveals, the various research streams have not all pursued investigations of hold-ups to the same extent as research on organizational design and inter-firm trade decisions, even though hold-ups are likely to affect intra-firm trade and resource allocation decisions. In sum, this review not only integrates the findings of the various disciplines and research streams, but also suggests directions future research might take