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Simple Efficient Contracts in Complex Environments

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  • Robert Evans

Abstract

This paper studies a general model of holdup in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modeled as an infinite-horizon noncooperative bargaining game, then, with a simple initial contract, an efficient equilibrium will generally exist. The contract is robust in the sense that it does not depend on fine details of the model. The contract gives authority to one party to set the terms of trade and gives the other party a nonexpiring option to trade at these terms. The difference from standard results arises because the initial contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment. Copyright Copyright 2008 by The Econometric Society.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2008.00844.x
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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 76 (2008)
Issue (Month): 3 (05)
Pages: 459-491

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Handle: RePEc:ecm:emetrp:v:76:y:2008:i:3:p:459-491

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References

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  1. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
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  4. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
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Citations

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Cited by:
  1. Buzard, Kristy & Watson, Joel, 2010. "Contract, Renegotiation, and Hold Up: Results on the Technology of Trade and Investment," University of California at San Diego, Economics Working Paper Series qt3df3q4vg, Department of Economics, UC San Diego.
  2. Bester, Helmut, 2013. "Investments and the holdup problem in a matching market," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 302-311.
  3. Bester, Helmut & Krähmer, Daniel, 2013. "Exit options and the allocation of authority," Discussion Papers 2013/5, Free University Berlin, School of Business & Economics.
  4. James M. Malcomson, 2012. "Relational Incentive Contracts
    [The Handbook of Organizational Economics]
    ," Introductory Chapters, Princeton University Press.
  5. Bull, Jesse & Watson, Joel, 2002. "Hard Evidence and Mechanism Design," University of California at San Diego, Economics Working Paper Series qt7715f08f, Department of Economics, UC San Diego.
  6. Christian A. Ruzzier, 2009. "Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered," Harvard Business School Working Papers 09-119, Harvard Business School.
  7. Watson, Joel & Buzard, Kristy, 2009. "Contract, Renegotiation, and Hold Up: General Results on the Technology of Trade and Investment," University of California at San Diego, Economics Working Paper Series qt3923q7kz, Department of Economics, UC San Diego.
  8. Bard Harstad, 2009. "The Dynamics of Climate Agreements," Discussion Papers 1474, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Bester, Helmut & Krähmer, Daniel, 2008. "Exit Options in Incomplete Contracts with Asymmetric Information," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 251, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  10. Watson, Joel & Wignall, Chris, 2009. "Hold-Up and Durable Trading Opportunities," University of California at San Diego, Economics Working Paper Series qt8p8284wg, Department of Economics, UC San Diego.
  11. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
  12. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.

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