Contract, Renegotiation, and Hold Up: Results on the Technology of Trade and Investment
AbstractThis paper examines a class of contractual relationships with specific investment, a non-durable trading opportunity, and renegotiation. Trade actions are modeled as individual and trade-action-based option contracts (â€œnon-forcing contractsâ€) are explored. The paper identifies an important distinction, between divided and unified investment and trade actions, that plays a key role in determining whether efficient investment and trade can be achieved. By using non-forcing contracts, the party without the trade action can be made residual claimant with regard to the investment action, which implies that an efficient outcome can be achieved in the divided case but not typically in the unified case. More generally, the paper shows that, with ex post renegotiation, constraining parties to use â€œforcing contractsâ€ implies a strict reduction in the set of implementable value functions. Tools are developed for calculating the â€œpunishment valuesâ€ that determine the sets of implementable post-investment value functions.
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Bibliographic InfoPaper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt3df3q4vg.
Date of creation: 19 Jun 2010
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forcing contracts; punishment values; Industrial Organization;
Other versions of this item:
- Watson, Joel & Buzard, Kristy, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
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