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Abstract

We develop a holdup model where multiple parties in the food chain (input suppliers, farmers, and buyers of the produce) invest in co-specific assets necessary for an innovative product. Shapley value is used in a multilateral bargaining game to assign bargaining power to the players, which correspondingly determines the surplus division.The conditions under which holdup is avoided and Pareto improving exchange will obtain are demonstrated. Two market responses to the holdup problem are considered. One is partial redistribution of specific investment costs serving as a credible commitment. The other is vertical/lateral integration, which changes the distribution of bargaining power.

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