The Double Holdup Problem and Legal Competition

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German Working Papers in Law and Economics

AUTHOR:
Bruno Deffains and Dominique Demougin

TITLE:
The Double Holdup Problem and Legal Competition

SUGGESTED CITATION:
Bruno Deffains and Dominique Demougin (2007) "The Double Holdup Problem and Legal Competition", German Working Papers in Law and Economics: Vol. 2007: Article 20.
http://www.bepress.com/gwp/default/vol2007/iss1/art20

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ABSTRACT:
Many have undertaken to show the potential negative impact of legal and institutional competition. We show a similar problem in one of the central institutional design problem in an economy,namely the allocation of bargaining power between labor and capital. We construct a simple model where the firm/worker relationship is characterized by a double hold up problem. The legal and institutional framework has an important role to play by determining the bargaining strength of the party. We derive the optimal bargaining power in autarky. Embedding the framework in a two country model where capital is perfectly mobile whereas workers are not, we find that in a noncooperative equilibrium a benevolent regulator will not implement the optimal solution.