Cooperative Investments and the Reasons for Underinvestment in Relationship-Specific Assets

Abstract

Cooperative investments could decrease the value of investor’s outside options. This effect can be considered as explanation of underinvestment in relation-specific assets alternative to «freeriding » reasoning proposed by Grossman-Hart-Moore. The nature of this effect could be associated with costs of specificity removal or inescapable negative consequences of selected specificity. It might also be related to investor’s losses associated with delay in establishing contacts with alternative partners. This negative effect is especially important in the situations when values of partners’ outside options change in opposite directions. The hybrid investments analysis is preferable to pure cooperative investments consideration as the “asymmetry” of partners’ hybrid investments promotes to this result. Through the lens of this analysis vertical restraints represent an essential element of initial contract maintaining and specific investment protection.

Keywords:

cooperative investments, vertical restraints, hold-up problem, underinvestment