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Cooperative Investments and the Value of Contracting

  • Donald B. Hausch
  • Yeon-Koo Che

Recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting. These studies typically considered 'selfish' investments that benefit the investor (e.g., the seller's investment reduces her production costs). The authors find very different results for 'cooperative' investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). Most importantly, if committing not to renegotiate the contract is impossible, then contracting has no value, i.e., the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.89.1.125
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 89 (1999)
Issue (Month): 1 (March)
Pages: 125-147

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Handle: RePEc:aea:aecrev:v:89:y:1999:i:1:p:125-147
Note: DOI: 10.1257/aer.89.1.125
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  18. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
  19. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
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