Contractual remedies to the holdup problem : a dynamic perspective
AbstractAn important theme of modern contract theory is the role contracts play to protect parties from the risk of holdup and thereby encouraging their relationship specific investments. While this perspective has generated valuable insights about various contracts, the underyling models abstract from realistic investment dynamics. We reexamine the role of contracts in a dynamic model that endogenizes the timing of investments and trade. The resulting interaction between bargaining and investment significantly alters the insights learned from static models. We show that contracts that would exacerbate the partiesâ vulnerability to holdup â rather than those protecting them from the risk of holdup â can be desirable. For this reason, separate ownership of complementary assets can be optimal, an exclusivity agreement can protect the investments of its recipient, trade contracts can be beneficial with a purely cooperative investment, and the property rule can offer a better legal protection against externalities loss than the liability rule, much in contrast to the existing results (based on static models).
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Bibliographic InfoPaper provided by Wisconsin Madison - Social Systems in its series Working papers with number 3.
Date of creation: 2004
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Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.
Other versions of this item:
- Yeon-Koo Che & Jozsef Sakovics, 2004. "Contractual Remedies to the Holdup Problem: A Dynamic Perspective," ESE Discussion Papers 100, Edinburgh School of Economics, University of Edinburgh.
- NEP-ALL-2005-10-15 (All new papers)
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