This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market...

We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and establish that capacity choices by strategic firms are...

The paper shows that the principal can enhance her control over the agent's human capital by acquiring the physical capital that is critical for him to create value. However, the enhancement in the control necessarily reduces his incentive to make human capital investment ex ante and to exert...