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Specific Performance, Separability Condition and the Hold-Up Problem

  • M'hand Fares

    ()

    (INRA (AGIR) and University of Paris 1)

Edlin and Reichelstein (1996) claim that an efficient solution to the hold-up problem can be implemented with a specific performance contract if a separability condition is satisfied, i.e. if the effect of investments and the effect of the state of the world enter the parties valuation functions in an additively separable manner. This note shows that this separability condition generates the same solution than if the valuation functions are independent of the sate of nature (proposition 1). This implies that a simple menu of prices that does not specify the level of trade can solve the hold-up problem (proposition 2). That is, specifying the terms of trade by writing a specific performance contract is useless with the separability condition.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I3-P55.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 2055-2062

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Handle: RePEc:ebl:ecbull:eb-09-00153
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  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Courts of law and unforeseen contingencies," LSE Research Online Documents on Economics 3576, London School of Economics and Political Science, LSE Library.
  2. M'hand Fares, 2006. "Renegotiation Design and Contract Solutions to the Hold-Up Problem," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 731-756, December.
  3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  4. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  5. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
  6. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Anderlini, L. & Felli, L., 1993. "Incomplete Written Contracts: Undescribable States of Nature," Papers 183, Cambridge - Risk, Information & Quantity Signals.
  8. 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.
  9. Anderlini, Luca & Felli, Leonardo, 2001. "Costly Bargaining and Renegotiation," Econometrica, Econometric Society, vol. 69(2), pages 377-411, March.
  10. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  11. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  12. Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, vol. 92(4), pages 798-817, September.
  13. Pierpaolo Battigalli & Giovanni Maggi, 2003. "Costly Contracting in a Long-Term Relationship," Working Papers 249, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Dye, Ronald A, 1985. "Costly Contract Contingencies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-50, February.
  15. Wagener, Andreas, 2006. "Chebyshev's Algebraic Inequality and comparative statics under uncertainty," Mathematical Social Sciences, Elsevier, vol. 52(2), pages 217-221, September.
  16. William P. Rogerson, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 777-793.
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