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Renegotiation and the Efficiency of Investments

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  • Steinar Holden

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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  • Steinar Holden, 1999. "Renegotiation and the Efficiency of Investments," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 106-119, Spring.
    • Handle: RePEc:rje:randje:v:30:y:1999:i:spring:p:106-119
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    Cited by:

    1. Steinar Holden, 1998. "Wage Drift and the Relevance of Centralised Wage Setting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 711-731, December.
    2. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May.
    3. Ciccotello, Conrad S & Hornyak, Martin J & Piwowar, Michael S, 2004. "Research and Development Alliances: Evidence from a Federal Contracts Repository," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 123-166, April.
    4. Steinar Holden & Fredrik Wulfsberg, 2014. "Wage Rigidity, Inflation, and Institutions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(2), pages 539-569, April.
    5. Holden, Helge & Holden, Lars & Holden, Steinar, 2010. "Contract adjustment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 657-680, April.
    6. Philip Lane, 2010. "Some Lessons for Fiscal Policy from the Financial Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp334, IIIS.
    7. Pascale Crama & Bert De Reyck & Niyazi Taneri, 2017. "Licensing Contracts: Control Rights, Options, and Timing," Management Science, INFORMS, vol. 63(4), pages 1131-1149, April.
    8. 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 & Francis Journals, vol. 9(3), pages 335-351.
    9. Holden, Helge & Holden, Lars & Holden, Steinar, 2004. "Contract Renewal," Memorandum 20/2004, Oslo University, Department of Economics.
    10. Delacroix, Alain, 2004. "Sticky bargained wages," Journal of Macroeconomics, Elsevier, vol. 26(1), pages 25-44, March.
    11. Ernst Fehr & Lorenz Goette, 2000. "How Robust are Nominal Wage Rigidities?," Econometric Society World Congress 2000 Contributed Papers 0071, Econometric Society.
    12. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS

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