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Incomplete Contracts. Non-Contractible Quality, and Renegotiation

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  • Lülfesmann Christoph

    () (University of Bonn)

Abstract

The paper reconsiders the hold-up problem in long-term bilateral trade with specific investments. In our framework, the parties face several trading opportunities (goods) whose characteristics cannot be described at the start of the relationship. Specifically, there exists an investment responsive `innovative' good, and (at least one) non-responsive `standard' good. In line with Hart and Moore (1988), renegotiation takes place as outside option bargaining. We first establish a first-best outcome for the case where trading the innovation is always efficient. This results contrasts with findings in Segal (1999) and Hart and Moore (1999) who adopt an alternative view of renegotiation. Then, we consider a setting where final trade is not always efficient, and show that a properly chosen at-will contract still implements the first best for a non-empty set of parameterizations. Finally, we show that at-will contracts strictly outperform option or specific-performance contracts.

Suggested Citation

  • Lülfesmann Christoph, 2001. "Incomplete Contracts. Non-Contractible Quality, and Renegotiation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 1(1), pages 1-47, June.
  • Handle: RePEc:bpj:bejtec:v:contributions.1:y:2001:i:1:n:2
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    Cited by:

    1. Dieter Bös & Christoph Lülfesmann, 2001. "Holdups, Quality Choice, and the Achilles' Heel in Government Contracting," Bonn Econ Discussion Papers bgse28_2001, University of Bonn, Germany.

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