How Effective Can Ex Post Destruction Alleviate the Hold-up Problem?

We first investigate whether or not ex post destruction can possibly alleviate the hold-up problem in a one-shot game between a supplier and a buyer. The answer is yes but only when the buyer believes that the supplier might be a Homo reciprocans agent with sufficiently strong propensity for reciprocity. Under incomplete information with informed supplier, investment is made feasible by the “mismatch” between the buyer’s belief of stronger supplier reciprocal propensity and a de facto weaker one. Under incomplete information with uninformed supplier, the “mismatch” between the buyer’s belief of weaker supplier reciprocal propensity and a stronger ex post one results in “destruction.” Thereafter, we inquire how effective the alleviation can be. We find out that the degree of efficiency improvement is positively correlated with the intensity of potential ex post destruction for the case of uninformed supplier while non-monotonically correlated with the buyer’s prior belief about the supplier’s uninformedness. JEL classification: C72, L14