HEC Research Papers Series,
HEC Paris

Abstract: We provide empirical evidence of the importance of hold-up problems for investment decisions in a large number of U.S. manufacturing industries. We exploit variation in the severity of hold-up problems between upstream suppliers and downstream customers resulting from import tariff reductions in upstream industries. We find that downstream customers respond by increasing investment. As theory predicts, the effect is stronger if the customers have little bargaining power and are not vertically integrated with their suppliers, if the suppliers produce differentiated inputs, if high uncertainty inhibits the use of long-term contracts, and if shipping costs are low.

Keywords: Hold-up Problems; Corporate Investment; Supply Chains; Import Tariffs

JEL-codes: D23; F14; G31; L14

51 pages, First version: November 1, 2016. Revised: June 27, 2017.

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