Bilateral Investment in a Delegated Common Agency
I study a bilateral investment game where a buyer privately trades with several suppliers who compete by offering menus of non-exclusive contracts. When market trading is structured so that competition among suppliers is the most intense, the hold-up problem disappears for an extensive range of the investment costs. The investment of the supplier does not affect its bargaining position, and both the supplier and the buyer have the right incentives to invest. In any other equilibria, the efficient investment is not implemented: the reallocation of bargaining power as a result of investment distorts the incentives to invest efficiently. However, because under some parameters of the model investment decisions are strategic complements welfare is maximised for an intermediate level of competition.
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