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Contract, renegotiation, and hold up: Results on the technology of trade and investment

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  • Buzard, Kristy

    () (Department of Economics, University of California, San Diego)

  • Watson, Joel

    () (Department of Economics, University of California, San Diego)

Abstract

This paper examines a class of contractual relationships with specific investment, a non-durable trading opportunity, and renegotiation. Trade actions are modeled as individual and trade-action-based option contracts ("non-forcing contracts") are explored. The paper introduces the distinction between divided and unified investment and trade actions, and it shows the key role this distinction plays in determining whether efficient investment and trade can be achieved. Under a non-forcing dual-option contract, the party without the trade action is made residual claimant with regard to the investment action, which induces efficient investment in the divided case. The unified case is more problematic; here, efficiency is typically not attainable but the dual-option contract is still optimal in a wide class of settings. More generally, the paper shows that, with ex post renegotiation, constraining parties to use "forcing contracts" implies a strict reduction in the set of implementable value functions.

Suggested Citation

  • Buzard, Kristy & Watson, Joel, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
  • Handle: RePEc:the:publsh:818
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    as


    Cited by:

    1. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-40, August.
    2. James E. Rauch & Joel Watson, 2015. "Client-Based Entrepreneurship," Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(1), pages 30-60.
    3. Göller, Daniel, 2015. "Contract, Renegotiation, and Holdup: When Should Messages be Sent?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113166, Verein für Socialpolitik / German Economic Association.
    4. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
    5. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-20, July.
    6. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), : The Handbook of Organizational Economics Princeton University Press.
    7. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, number 9889.
    8. repec:inu:caeprp:2014004 is not listed on IDEAS
    9. Mostafa Beshkar, 2014. "Arbitration and Renegotiation in Trade Agreements," Caepr Working Papers 2014-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

    More about this item

    Keywords

    Contract; renegotiation; hold up; forcing contracts; non-forcing contracts; specific investment; technology of trade; mechanism design;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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