The Trade Off between Sclerosis and Hold Up Problems : Rhenish vs. Anglosaxon Economies

This paper presents a simple model to explain the relative advantages of market economies with high turnover of firms and those with low turnover rates but long-term relationships. The two types of economies, labeled Anglosaxon and Rhenish respectively, arise as two equilibria that can simultaneously exist in the model. We show that welfare is not necessarily higher in one of the two. A trade off exists between sclerosis and a hold up problem. Our main result is that deregulation in a Rhenish economy yields smaller effects on output than in an Anglosaxon economy