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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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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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  1. Che, Y.K. & Chung, T.Y., 1995. "Incomplete Contracts and Cooperative Investments," Working papers 9524, Wisconsin Madison - Social Systems.
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  3. Che, Y.K. & Chung, Y.T., 1996. "Contract Damages and Cooperative Investments," UWO Department of Economics Working Papers 9612, University of Western Ontario, Department of Economics.
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  19. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
  20. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
  21. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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  23. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  24. 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.
  25. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
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