| Abstract: | When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to “over pay” for quality. In contrast to the standard holdup problem, this reverse‐holdup problem can give the firm an incentive to overinvest in non‐contractible quality. The paper also discusses some examples where the reverse‐holdup problem may explain excessive quality in government procurement. |
