The paper reconsiders the hold-up problem in long-term bilateral trade with specific investments. In our framework, the parties face several trading opportunities (goods) whose characteristics cannot be described at the start of the relationship. Specifically, there exists an investment responsive `innovative' good, and (at least one) non-responsive `standard' good. In line with Hart and Moore (1988), renegotiation takes place as outside option bargaining. We first establish a first-best outcome for the case where trading the innovation is always efficient. This results contrasts with findings in Segal (1999) and Hart and Moore (1999) who adopt an alternative view of renegotiation. Then, we consider a setting where final trade is not always efficient, and show that a properly chosen at-will contract still implements the first best for a non-empty set of parameterizations. Finally, we show that at-will contracts strictly outperform option or specific-performance contracts.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)