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Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem

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  • Thomas P. Lyon

Abstract

"Buyer-option" contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes. Copyright 2004, Oxford University Press.

Suggested Citation

  • Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
    • Handle: RePEc:oup:jleorg:v:20:y:2004:i:1:p:148-169
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Lyon, Thomas P & Huang, Haizhou, 2002. "Legal Remedies for Breach of the Regulatory "Contract."," Journal of Regulatory Economics, Springer, vol. 22(2), pages 107-132, September.
    3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
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    5. Paul L. Joskow, 1990. "The Performance of Long-Term Contracts: Further Evidence from Coal Markets," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 251-274, Summer.
    6. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
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