Apart from the familiar holdup problem, we investigate another implication of specific investment that has not been examined systematically in the literature. That is, the presence of specific investment can make a supplier vulnerable to large negative shocks to its customer's business. We demonstrate that this vulnerability causes the supplier to under-invest and a larger volatility in the customer's business exacerbates the supplier's under-investment. More surprisingly, a higher degree of specificity may induce the supplier to invest more, rather than less, in the specific asset.

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Keywords Holdup problem, Specific investment, Supplier vulnerability
Persistent URL dx.doi.org/10.1016/j.econlet.2016.11.033
Journal Economics Letters
Chen, Z, & Wang, X. (Xiaoqiao). (2017). Specific investment and supplier vulnerability. Economics Letters, 151, 16–18. doi:10.1016/j.econlet.2016.11.033