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Exclusive Contracts Foster Relationship-Specific Investment

  • David de Meza
  • Mariano Selvaggi

    ()

Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, notably Segal and Whinston (2000), we show that investments that are specific to the contracted parties may be encouraged. Results depend on the nature of the investments and whether the bargaining is cooperative or non-cooperative. The major part of the analysis show that exclusive contracts designed to 'assure' the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a finite penalty for breach achieves the first-best outcome.

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Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 04/105.

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Length: 35 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:bri:cmpowp:04/105
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