| This thesis is an analysis of the "hold-up" problem that occurs when a company must make firm-specific investments. In the absence of binding contracts, after a firm chooses its level of investment, strategic partners of the firm may utilize its advantage as a second mover to extract some of the surplus associated with the sunk cost of investment, inducing inefficient investment. The core of this research is an examination of how repeated interaction and organizational innovations may facilitate cooperation between the parties and thus allow a higher level of investment on the part of the firm.;When both parties are better off under cooperation (defined by the firm choosing the high level of investment and the strategic partner not holding up the firm), repeated interaction will facilitate cooperation if both parties value the future highly enough. When the partner is sufficiently myopic, however, cooperation is infeasible without some kind of organizational innovation. It is in the firm's private interest to seek out these innovations, because its profits are higher under cooperation. The firm, by voluntarily paying a private rent transfer to the partner and thus changing the distribution of returns accruing to each party, may alter the incremental return to cooperation for its partner such that cooperation becomes feasible. There are circumstances, however, where the strategic partner is sufficiently myopic that the firm cannot, by itself, alter the returns sufficiently to achieve cooperation.;A strategic third party (such as the government or a corporate parent of the firm) may intervene in this relationship to increase the returns to cooperation or worsen the cost of defection and thus make cooperation feasible where it previously was not. Three conditions must hold in order for this intervention to succeed: first, the third party must be able to develop a credible reputation for rewarding cooperation or punishing defection; second, the third party must be able to observe an accurate signal that cooperation has occurred; and finally, the third party must be able to internalize a fraction of the gains to cooperation. When these three conditions hold, the third party can successfully design an intervention that expands the feasible space of cooperation. |
