Amitabh Bachchan, Deewar, and the Hold Up Problem

In the film Deewar, Amitabh Bachchan (AB) plays a coolie whose origins draw from a childhood born of homelessness and poverty.

In one of the first few scenes of the film, AB opposes the illegal extraction of wages (earned by AB and his co-coolies) by some local goons. Seeing this, a rich dude in a car pulls up next to AB a few days later and impressed by this opposition enlists AB to land some gold (probably illegally) for him.

Now, apparently, when AB was a child, he used to shine shoes to make money and had shined the shoes of this rich dude. So post-enlisting, rich dude throws some money on the table as payment, where AB states "You may remember a kid who refused to pick up money thrown at him. I still don't pick up money thrown at me..."

This sets up a double-cross later on, when AB gives out details of the landing of the gold to some other rich dude who is probably the first rich dude's competitor. (By the way it's interesting that such a negative action is being carried out by the main hero, but this theme has probably been written about till its death).

On the completion of the double-cross, the other rich dude takes out a gun and states "You've given me the gold, now what if I refuse to pay you". The gun is an explicit threat to back up the refusal.

To which AB replies with a story of the guy who killed the golden goose. The other rich dude laughs, and the two - other rich dude and AB - decide to enter into a long term relationship. Or, at least, that's the impression one gets from the line "It will be a pleasure to work with you" that the other rich dude utters as a means of settling the bargain.

This is essentially a resolution of an (ex-post) hold-up problem. The hold-up is that the buyer (other rich dude) may refuse to honour payment to the seller (AB), but because AB carries great human asset specificity (his value to the buyer in his present use - carrying out double cross i.e. working as informant - is much lesser than in any other use - death or no use at all - which is conveyed to the buyer by AB telling the story of the golden goose) it is better to enter into a long term relationship. This will protect the value of the trade - influenced in this story almost entirely by AB's asset specificity - and minimize haggling ex-post.

Essentially they sign a contract to certify this expectation, although this is a verbal one. The buyer fears that he will lose out on an increased value of trade - which arises from the seller's asset specificity- and costs this will impose on him. The seller fears the buyer may be out to screw him. The contract between the two is therefore understood as attempting to minimize these fears- ex-post haggling costs - with the result that trade of higher value (than would be possible without a contract) occurs. At this point, my brain is jumping with ideas about how cheap talk influences the process of getting into a contract, but this is a separate idea.

So contractual decisions are understood as a response to minimizing opportunistic behaviour and result in efficient trade. It should be evident that the focus of this Williamson inspired view (on why a long term contract is signed) is explicitly on adaptation problems that occur in a strictly ex-post sense. Notice that the hold-up can arise from both the buyer and supplier's side. (In fact it seems more intuitive that the seller should be the one attempt to engage in ex-post haggling.) So the optimal contract really ought to protect both parties interests against this eventuality.

Also notice that without asset specificity, this theory will not work. Ex-post haggling is costly because of the asset specificity. After all if there were a lot of AB's in the market, the buyer could just let AB go without payment and replace without hassle. But if there are few AB's then the costs of finding a replacement are very high. The relationship specific investment by AB - finding out information - makes AB a very specific asset, which then is used to convince the buyer that a long term relationship will make both parties better off.

Two points are important - one, if we find long term relationships without any specificity involved what is going on? Two, clearly, by this example, it is evident that the role of talking is important. Although the buyer knows of AB's specificity his attempt at expropriating some of the gains from trade are frustrated because AB's utterance makes AB's specificity common knowledge. Real research idea here, this hasn't really been worked on.

To the first point then: the recent theory by Patrick Bajari and Steven Tadelis attempts to rescue this basic notion - that contractual decisions are best understood as a result of minimizing ex-post haggling costs - by the notion that ex-post haggling can arise from factors external to the buyer-supplier relationship. Specifically, the complexity of the transaction can influence ex-post haggling costs. This theory is what I seek to test as my dissertation, and so far, it does seem to work.