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Strategic Capacity Investment under Hold-up Threats: The Role of Contract Length and Width

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  • Laure Durand-Viel
  • Bertrand Villeneuve

Abstract

We analyze the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two‐part tariffs, the length of the contract is irrelevant: the surplus is maximal and goes to the seller. In linear contracts, the seller prefers the shortest contract and the buyer the longest one. Further, the commitment period concentrates the incentives, whereas afterwards there is rent extraction. The socially efficient contract is as short as possible; yet, long contracts can be promoted because of the surplus they allocate to the buyer.
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Suggested Citation

  • Laure Durand-Viel & Bertrand Villeneuve, 2016. "Strategic Capacity Investment under Hold-up Threats: The Role of Contract Length and Width," Manchester School, University of Manchester, vol. 84(3), pages 313-339, June.
  • Handle: RePEc:bla:manchs:v:84:y:2016:i:3:p:313-339
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    File URL: http://hdl.handle.net/10.1111/manc.12100
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    1. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December.

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    More about this item

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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