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Cooperative Investments and the Value of Contracting

  • Che, Y.K.
  • Hausch, D.B.

Several recent articles have shown that the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting, can be supported with appropriately-designed contracts. These studies have, for the most part, restricted attention to so called "selfish" investments that benefit the investor (e.g., the seller's investment reduces her cost of producing the good). We find very different results for "cooperative" investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). If the parties can commit not to renegotiate, schemes exist that can achieve the efficient outcome as a subgame perfect equilibrium.

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File URL: http://www.ssc.wisc.edu/econ/archive/wp9714.pdf
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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 9714.

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Length: 24 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:att:wimass:9714
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UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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