Option contracts and renegotiation: A solution to the Hold-Up Problem
AbstractThe paper analyzes the canonical hold-up model of Hart and Moore (1988) under the assumption that the courts can verify delivery of the good by the seller. We show that the first best can be achieved using simple "option contracts" which give the seller the right to decide whether or not trade takes place. Our result does not rely on "renegotiation design" but takes the renegotiation game as exogenously given. Furthermore, we characterize an interesting class of cases in which renegotiation is unnecessary to achieve the first best.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19329.
Date of creation: 1995
Date of revision:
Publication status: Published in The Rand journal of economics 2 26(1995): pp. 163-179
Other versions of this item:
- Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
- Georg NÃ¶ldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
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