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Option Contracts and Renegotiation: A Solution to the Hold-Up Problem

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  • Georg Noldeke
  • Klaus M. Schmidt

Abstract

In this article, we analyze the canonical hold-up model of Hart and Moore under the assumption that the courts can verify delivery of the good by the seller. It is shown that no further renegotiation design is necessary to achieve the first best: simple option contracts, which give the seller the right to make the delivery decision and specify payments depending on whether delivery takes place, allow implementation of efficient investment decisions and efficient trade.

Suggested Citation

  • Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
  • Handle: RePEc:rje:randje:v:26:y:1995:i:summer:p:163-179
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    1. Michael Rothschild & Lawrence J. White, 1993. "The University in the Marketplace: Some Insights and Some Puzzles," NBER Chapters,in: Studies of Supply and Demand in Higher Education, pages 11-42 National Bureau of Economic Research, Inc.
    2. Tjalling C. Koopmans & Martin J. Beckmann, 1955. "Assignment Problems and the Location of Economic Activities," Cowles Foundation Discussion Papers 4, Cowles Foundation for Research in Economics, Yale University.
    3. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 112-134.
    4. Dennis W. Carlton & Gustavo E. Bamberger & Roy J. Epstein, 1994. "Antitrust and Higher Education," University of Chicago - George G. Stigler Center for Study of Economy and State 107, Chicago - Center for Study of Economy and State.
    5. Roth, Alvin E. & Sotomayor, Marilda, 1992. "Two-sided matching," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 16, pages 485-541 Elsevier.
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