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

  • Watson, Joel

    ()

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

  • Buzard, Kristy

    ()

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

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.

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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 7 (2012)
Issue (Month): 2 (May)
Pages:

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Handle: RePEc:the:publsh:818
Contact details of provider: Web page: http://econtheory.org

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  1. Leonid Hurwicz, 1994. "Economic design, adjustment processes, mechanisms, and institutions," Review of Economic Design, Springer, vol. 1(1), pages 1-14, December.
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  13. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  14. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
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  27. repec:fiu:wpaper:0909 is not listed on IDEAS
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