Can two negotiators fail to agree when both the size of the surplus and the rationality of the negotiators are common knowledge? We show that the answer is affirmative. When the negotiators can make irrevocable commitments at a low but positive cost, the unique symmetric equilibrium entails...

The paper examines the theoretical foundations of the hold-up problem. At the first stage, one agent decides on the level of a relationship-specific investment. There is no contract, so at the second stage the agent must bargain with a trading partner over the surplus that the investment has...