151
The hostage model.
Party A
Party B
Use non-specialized
technology
Hold up
Don’t
hold up
(
½π,
½π
)
(
0,
-C
)
w
The hold-up threat in extensive form.
Party A
Don’t
give in
Give in
(
0.9π,
0.1π
)
w
Party A’s optimal strategy is to use the less-
efficient technology. (Why?)
w
Party A incurs a sunk cost C once the contract is signed.
Use specialized
technology
(
¼π,
¼π
)
