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Renegotiation and the Efficiency of Investments

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Author Info
Steinar Holden

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Abstract

In a long-term relationship between two parties, one party's threat of a unilateral violation of an initial contract may induce a renegotiation of the contract. As a renegotiation may result in one party capturing some of the return from the other's investments, this possibility may lead to underinvestment. I show that if there is uncertainty associated with the outcome of a renegotiation, and if players are risk averse, there will be an interval for the initial contract so that it is not renegotiated. By an appropriate choice of the initial contract, underinvestment can thus be avoided.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 30 (1999)
Issue (Month): 1 (Spring)
Pages: 106-119
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Handle: RePEc:rje:randje:v:30:y:1999:i:spring:p:106-119

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  1. Nigel Driffield & Max Munday & Annette Roberts, 2002. "Foreign Direct Investment, Transactions Linkages, and the Performance of the Domestic Sector," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 9(3), pages 335-351, November. [Downloadable!] (restricted)
  2. Ernst Fehr & Lorenz Goette, 2007. "The Robustness and Real Consequences of Nominal Wage Rigidity," Kiel Working Papers 1343, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  3. Helge Holden & Lars Holden & Steinar Holden, 2005. "Contract Adjustment under Uncertainty," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  4. Orietta DESSY, 2005. "Nominal wage rigidity in Europe: estimates and institutional causes," Departemental Working Papers 2005-09, Department of Economics University of Milan Italy. [Downloadable!]
  5. Steinar Holden, 2004. "Wage Formation under Low Inflation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  6. Ernst Fehr & Lorenz Goette, 2000. "How Robust are Nominal Wage Rigidities?," Econometric Society World Congress 2000 Contributed Papers 0071, Econometric Society. [Downloadable!]
  7. Holden, Helge & Holden, Lars & Holden, Steinar, 2004. "Contract Renewal," Memorandum 20/2004, Oslo University, Department of Economics. [Downloadable!]
  8. Ernst Fehr & Lorenz Goette, 2000. "Robustness and Real Consequences of Nominal Wage Rigidity," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  9. Steinar Holden, 2001. "Monetary Policy and Nominal Rigidities under Low Inflation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  10. Holden,S., 2001. "Does price stability exacerbate labour market rigidities in the EMU?," Memorandum 10/2001, Oslo University, Department of Economics. [Downloadable!]
    Other versions:
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