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Simple Efficient Contracts in Complex Environments

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  • Robert Evans

Abstract

This paper studies a general model of holdup in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modeled as an infinite-horizon noncooperative bargaining game, then, with a simple initial contract, an efficient equilibrium will generally exist. The contract is robust in the sense that it does not depend on fine details of the model. The contract gives authority to one party to set the terms of trade and gives the other party a nonexpiring option to trade at these terms. The difference from standard results arises because the initial contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment. Copyright Copyright 2008 by The Econometric Society.

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  • Robert Evans, 2008. "Simple Efficient Contracts in Complex Environments," Econometrica, Econometric Society, vol. 76(3), pages 459-491, May.
  • Handle: RePEc:ecm:emetrp:v:76:y:2008:i:3:p:459-491
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    References listed on IDEAS

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    Cited by:

    1. Bård Harstad, 2016. "The Dynamics Of Climate Agreements," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 719-752, June.
    2. Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.
    3. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    4. Bester, Helmut, 2013. "Investments and the holdup problem in a matching market," Journal of Mathematical Economics, Elsevier, vol. 49(4), pages 302-311.
    5. Lewis A. Kornhauser & W. Bentley MacLeod, 2012. "Contracts between Legal Persons," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    6. Bull, Jesse & Watson, Joel, 2007. "Hard evidence and mechanism design," Games and Economic Behavior, Elsevier, vol. 58(1), pages 75-93, January.
    7. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
    8. Anil Arya & Joel Demski & Jonathan Glover & Pierre Liang, 2009. "Quasi-Robust Multiagent Contracts," Management Science, INFORMS, vol. 55(5), pages 752-762, May.
    9. Bester, Helmut & Krähmer, Daniel, 2013. "Exit Options and the Allocation of Authority," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 401, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    10. Cardona, Daniel & Rubí-Barceló, Antoni, 2014. "Investments and bargaining in a model with positive consumption externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 78-93.
    11. Christian A. Ruzzier, 2009. "Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered," Harvard Business School Working Papers 09-119, Harvard Business School.
    12. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), : The Handbook of Organizational Economics Princeton University Press.
    13. James M. Malcomson, 2012. "Relational Incentive Contracts," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    14. Watson, Joel & Buzard, Kristy, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    15. Watson, Joel & Buzard, Kristy, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    16. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, number 9889, June.
    17. Watson, Joel & Wignall, Chris, 2009. "Hold-Up and Durable Trading Opportunities," University of California at San Diego, Economics Working Paper Series qt8p8284wg, Department of Economics, UC San Diego.

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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