We report laboratory experiments investigating the cyclicality of profit-enhancing investment in a competitive … environment. In our setting, optimal investment is counter-cyclical when investment costs fall following market downturns. However …, we do not observe counter-cyclical investment. Instead we see much less strategic behavior than our rational investment …

development. These activities often include relationship-specific investment on the part of the vendor, while final outcomes can …, especially when relationship- specific investment is required, may leave the supplier vulnerable to a version of the ‘‘hold …-up problem,'' which is known to result in sub-optimal levels of investment. We model the phenomenon as a sequential move game …