Dixit versus Williamson: the ‘fundamental transformation’ reconsidered

Comparing the literature on hold-up and strategic entry deterrence 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 acknowl- edged, the threat of hold-up against investor is largely weakened. Contrary to pre- vious literature, in this respect, asset 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 interactions between contractual arrangements and market structure.