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Contractual signalling, relationship-specific investment and exclusive agreements

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Author Info
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
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Handle: RePEc:unl:unlfep:wp495

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March. [Downloadable!] (restricted)
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  4. 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. [Downloadable!]
  5. Ilya Segal & Michael D. Whinston, 2002. "The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)," Econometrica, Econometric Society, vol. 70(1), pages 1-45, January. [Downloadable!] (restricted)
  6. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
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  7. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
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  11. Maskin, Eric & Tirole, Jean, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 139-49, January. [Downloadable!] (restricted)
  12. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May. [Downloadable!] (restricted)
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  15. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September. [Downloadable!] (restricted)
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  17. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Blackwell Publishing, vol. 58(5), pages 1031-42, October. [Downloadable!] (restricted)
  18. Ilya Segal & Michael D. Whinston, 2000. "Exclusive Contracts and Protection of Investments," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 603-633, Winter.
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  20. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Selvaggi, Marianao & Vasconcelos, Luis, 2006. "Star Wars: Exclusive Superstars and Collusive Outcomes," FEUNL Working Paper Series wp496, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
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