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Contractual signalling, relationship-specific investment and exclusive agreements

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  • Vasconcelos, Luis

Abstract

I analyze a simple model of hold-up with asymmetric information at the con- tracting stage. I show that contractual signalling and e¢ ciency of investment can con?ict if only quantity is contractible. This is because contracted quantity encourages investment in the relationship but also signals information. This con?ict generates ine¢ cient equilib- ria in terms of investment. Contracting on exclusivity in addition to quantity resolves the con?ict (and consequently eliminates the ine¢ ciency of investment) when the asymmetry of information concerns the value of trade with external parties. While exclusivity also signals information, unlike quantity it does not directly a¤ect relationship-speci?c investment.

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Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp495.

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Length: 51 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:unl:unlfep:wp495

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  6. repec:att:wimass:9714 is not listed on IDEAS
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  8. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, Department of Economics, University of Bristol, UK.
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Cited by:
  1. Fumagalli, Chiara & Motta, Massimo & Rønde, Thomas, 2009. "Exclusive dealing: the interaction between foreclosure and investment promotion," CEPR Discussion Papers 7240, C.E.P.R. Discussion Papers.
  2. Selvaggi, Marianao & Vasconcelos, Luis, 2006. "Star Wars: Exclusive Superstars and Collusive Outcomes," FEUNL Working Paper Series wp496, Universidade Nova de Lisboa, Faculdade de Economia.

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