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Option Contracts and Renegotiation - A Solution to the Hold-Up Problem

  • Georg Nöldeke
  • Klaus M. Schmidt

The paper analyzes the canonical hold-up model of Hart and Moore (1988) under the assumption that the courts can verify delivery of the good by the seller. We show that the first best can be achieved using simple "option contracts" which give the seller the right to decide whether or not trade takes place. Our result does not rely on "renegotiation design" but takes the renegotiation game as exogenously given. Furthermore, we characterize an interesting class of cases in which renegotiation is unnecessary to achieve the first best.

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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 417.

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Length: 18 pages
Date of creation: Feb 1992
Date of revision: Aug 1993
Handle: RePEc:bon:bonsfa:417
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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