The ‘Fundamental Transformation’ Reconsidered: Dixit vs. Williamson

Abstract

We argue that Williamson’s approach to the hold-up problem, largely ignores the potential entry deterrence effect induced by assets specificity. Indeed, comparing the literature on hold-up and specific investments (Williamson, 1985) and the one on strategic entry deterrence originated by Dixit (1980) leads to a puzzling role for sunk or specific investments, in affecting investor’s incentive. In one case, non-redeployable investments decrease investor’s ex-post bargaining power, in the other they increase it. When the entry deterrence effect is acknowledged, the threat of hold-up against investor is largely weakened and assets specificity may even constitute an endogenous enforcement device for incomplete contracts. We conclude that the impact of asset specificity on investor’s post-contractual power, far from being general, depends on the nature of contract-market interactions.