Advanced Search
MyIDEAS: Login

Contractual solutions to hold-up problems with quality uncertainty and unobservable investments

Contents:

Author Info

  • Schmitz, Patrick W.

Abstract

Consider a seller and a buyer who write a contract. After that, the seller produces a good. She can influence the expected quality of the good by making unobservable investments. Only the seller learns the realized quality. Finally, trade can occur. It is always ex post efficient to trade. Yet, it may be impossible to achieve the first best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. The second best is characterized by distortions that are reminiscent of adverse selection models (i.e., models with precontractual private information but without hidden actions).

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VBY-509W7D8-2/2/8f4b1d558a72352946f2f8f575ef996a
Download Restriction: Full text for ScienceDirect subscribers only

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.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 46 (2010)
Issue (Month): 5 (September)
Pages: 807-816

as in new window
Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:807-816

Contact details of provider:
Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Hold-up problem Hidden action Hidden information Common values;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  2. Vijay Krishna & Motty Perry, 1997. "Efficient Mechanism Design," Game Theory and Information 9703010, EconWPA, revised 28 Apr 1998.
  3. repec:att:wimass:9714 is not listed on IDEAS
  4. Schmitz, Patrick W., 2007. "Incomplete Contracts, the Hold-Up Problem and Asymmetric Information," CEPR Discussion Papers 6322, C.E.P.R. Discussion Papers.
  5. Hoppe, Eva I. & Schmitz, Patrick W., 2012. "Public-private partnerships versus traditional procurement: Innovation incentives and information gathering," MPRA Paper 41966, University Library of Munich, Germany.
  6. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Can Contracts Solve the Hold-Up Problem? Experimental Evidence," CEPR Discussion Papers 7205, C.E.P.R. Discussion Papers.
  7. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
  8. Schmitz, Patrick W., 2002. "Simple contracts, renegotiation under asymmetric information, and the hold-up problem," European Economic Review, Elsevier, vol. 46(1), pages 169-188, January.
  9. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  11. Hart, Oliver & Shleifer, Andrei & Vishny, Robert W, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1127-61, November.
  12. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  13. Bester, Helmut, 2009. "Investments and the Holdup Problem in a Matching Market," CEPR Discussion Papers 7332, C.E.P.R. Discussion Papers.
  14. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  15. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Steven R. Williams, 1999. "A characterization of efficient, bayesian incentive compatible mechanisms," Economic Theory, Springer, vol. 14(1), pages 155-180.
  17. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  18. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-32, May.
  19. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  20. Ariel Rubinstein & Asher Wolinsky, 1989. "Renegotiation-Proof Implementation and Time Preferences," Discussion Papers 850, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  21. Stremitzer, Alexander, 2008. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 242, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  22. Oliver Hart, 2008. "Economica Coase Lecture Reference Points and the Theory of the Firm," Economica, London School of Economics and Political Science, vol. 75(299), pages 404-411, 08.
  23. Schmitz, Patrick W., 2005. "Information Gathering, Transaction Costs and the Property Rights Approach," CEPR Discussion Papers 5417, C.E.P.R. Discussion Papers.
  24. Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2008. "Contracts as Reference Points: Experimental Evidence," IZA Discussion Papers 3889, Institute for the Study of Labor (IZA).
  25. Jehiel, Philippe & Moldovanu, Benny, 2006. "Allocative and Informational Externalities in Auctions and Related Mechanisms," CEPR Discussion Papers 5558, C.E.P.R. Discussion Papers.
  26. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
  27. Guriev Sergei, 2003. "Incomplete Contracts with Cross-Investments," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-32, August.
  28. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  29. Matsuo, Toshihide, 1989. "On incentive compatible, individually rational, and ex post efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 49(1), pages 189-194, October.
  30. Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, vol. 72(5), pages 1617-1626, 09.
  31. Hoppe, Eva I. & Schmitz, Patrick W., 2010. "Public versus private ownership: Quantity contracts and the allocation of investment tasks," Journal of Public Economics, Elsevier, vol. 94(3-4), pages 258-268, April.
  32. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  33. Cremer, Jacques, & Riordan, Michael H, 1985. "A Sequential Solution to the Public Goods Problem," Econometrica, Econometric Society, vol. 53(1), pages 77-84, January.
  34. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
  35. Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
  36. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  37. Anke S. Kessler & Christoph Lülfesmann, 2002. "The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments," CESifo Working Paper Series 776, CESifo Group Munich.
  38. Oliver Hart, 2009. "Hold-Up, Asset Ownership, and Reference Points-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 267-300, February.
  39. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 315-329, October.
  40. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  41. Akira Konakayama & Toshihide Mitsui & Shinichi Watanabe, 1986. "Efficient Contracting with Reliance and a Damage Measure," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 450-457, Autumn.
  42. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
  43. Schmitz, Patrick W., 2008. "Joint ownership and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 99(3), pages 577-580, June.
  44. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 39-56, January.
  45. Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 171-195, Summer.
  46. Schmitz, Patrick W., 2008. "Information Gathering and the Hold-Up Problem in a Complete Contracting Framework," CEPR Discussion Papers 6988, C.E.P.R. Discussion Papers.
  47. Schmitz, Patrick W., 2002. "On simple contracts, renegotiation under asymmetric information, and the hold-up problem," MPRA Paper 12530, University Library of Munich, Germany.
  48. Farrell, Joseph & Gibbons, Robert, 1995. "Cheap Talk about Specific Investments," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 313-34, October.
  49. Schweizer, Urs, 2006. "Universal possibility and impossibility results," Games and Economic Behavior, Elsevier, vol. 57(1), pages 73-85, October.
  50. Alan Schwartz & Robert Scott, . "Contract Theory and the Limits of Contract Law," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1011, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  51. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
  52. Alan Schwartz, 1997. "Incomplete Contracts," Yale School of Management Working Papers ysm73, Yale School of Management.
  53. Klibanoff, Peter & Morduch, Jonathan, 1995. "Decentralization, Externalities, and Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 223-47, April.
  54. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 597-610.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Bester, Helmut, 2009. "Investments and the Holdup Problem in a Matching Market," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 263, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:807-816. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.