Price-setting power vs. private information: An experimental evaluation of their impact on holdup

This paper investigates the extent of the holdup problem in a buyer-seller relationship in which the seller has private information about his alternative opportunities. Theory predicts that, compared to a situation in which outside options are publicly observed, the seller obtains an informational rent whereas the buyer bears an informational loss. As a result the seller is predicted to invest more while the buyer is expected to invest less. In contrast to this, private information has no impact on the investment levels observed in the experiment. But actual investments do increase with the price-setting power of the investor. These findings are roughly consistent with a model in which agents are inequality-averse. Overall the results question some recent theoretical suggestions that private information rents might substitute for price-setting power in mitigating holdup.