IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20120283/6721/218
Download Restriction: no

Article provided by Econometric Society in its journal Theoretical Economics.

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

as
in new window

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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Nöldeke, Georg & Schmidt, Klaus M., 1998. "Sequential investments and options to own," Munich Reprints in Economics 19327, University of Munich, Department of Economics.
  2. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 39-56.
  3. Sabine Böckem & Ulf Schiller, 2008. "Option Contracts in Supply Chains," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 219-245, 03.
  4. Sandeep Baliga & Tomas Sjostrom, 2005. "Contracting with Third Parties," Levine's Bibliography 784828000000000408, UCLA Department of Economics.
  5. Joel S. Demski & David E.M. Sappington, 1991. "Resolving Double Moral Hazard Problems with Buyout Agreements," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 232-240, Summer.
  6. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  7. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  8. Sergei Guriev, 2003. "Incomplete Contracts with Cross-Investments," Sciences Po publications info:hdl:2441/67o636bvfi8, Sciences Po.
  9. Joel Watson, 2007. "Contract, Mechanism Design, and Technological Detail," Econometrica, Econometric Society, vol. 75(1), pages 55-81, 01.
  10. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
  11. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  12. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
  13. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Courts of Law and Unforeseen Contingencies," STICERD - Theoretical Economics Paper Series 447, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  14. Beaudry, P. & Poitevin, M., 1993. "Contract Renegotiation: A Simple Framework and Implications for Organization Theory," Cahiers de recherche 9332, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  15. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
  16. Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
  17. Alexander Stremitzer, 2009. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Bonn Econ Discussion Papers bgse4_2009, University of Bonn, Germany.
  18. Matthew Ellman, 2004. "Specificity revisited: The role of cross-investments," Economics Working Papers 799, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
  19. Sönje Reiche, 2006. "Ambivalent Investment and the Hold-Up Problem," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1148-1164, December.
  20. Andreas Roider, 2004. "Asset Ownership and Contractibility of Interaction," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 787-802, Winter.
  21. Leonid Hurwicz, 1994. "Economic design, adjustment processes, mechanisms, and institutions," Review of Economic Design, Springer;Society for Economic Design, vol. 1(1), pages 1-14, December.
  22. William P. Rogerson, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 777-793.
  23. Jesse Bull, 2012. "Third-Party Budget Breakers and Side Contracting in Team Production," Economics Bulletin, AccessEcon, vol. 32(3), pages 2606-2614.
  24. Robert Evans, 2008. "Simple Efficient Contracts in Complex Environments," Econometrica, Econometric Society, vol. 76(3), pages 459-491, 05.
  25. Yeon-Koo Che & Jozsef Sakovics, 2001. "A Dynamic Theory of Holdup," ESE Discussion Papers 74, Edinburgh School of Economics, University of Edinburgh.
  26. Evans, R., 2006. "Mechanism Design with Renegotiation and Costly Messages," Cambridge Working Papers in Economics 0626, Faculty of Economics, University of Cambridge.
  27. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  28. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  29. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 139-149.
  30. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
  31. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-60, March.
  32. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  33. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:the:publsh:818. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin J. Osborne)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.