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Contract, Renegotiation, and Hold Up: General Results on the Technology of Trade and Investment

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  • Watson, Joel
  • Buzard, Kristy

Abstract

This paper examines a class of contractual relationships with specific investment, a non-durable trading opportunity, and renegotiation. FurtheringWatson’s (2007) line of analysis, trade actions are modeled as individual and trade-action-based option contracts are explored. Simple tools are developed for calculating the “punishment values” that determine the sets of implementable post-investment value functions, and two results are proved. The first result establishes that, with ex post renegotiation, constraining parties to use “forcing contracts” (as is implicit in public-action models) implies a strict reduction in the set of implementable value functions. The second result shows that, by using non-forcing contracts, the party without the trade action can be made residual claimant with regard to the investment action. The paper identifies an important distinction, between divided and unified investment and trade actions, that plays an important role in determining whether an efficient outcome is achieved.

Suggested Citation

  • Watson, Joel & Buzard, Kristy, 2009. "Contract, Renegotiation, and Hold Up: General Results on the Technology of Trade and Investment," University of California at San Diego, Economics Working Paper Series qt3923q7kz, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt3923q7kz
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    Citations

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    Cited by:

    1. Mostafa Beshkar, 2016. "Arbitration and Renegotiation in Trade Agreements," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(3), pages 586-619.
    2. Joel Watson & David A. Miller & Trond E. Olsen, 2020. "Relational Contracting, Negotiation, and External Enforcement," American Economic Review, American Economic Association, vol. 110(7), pages 2153-2197, July.
    3. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
    4. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, vol. 4(3), pages 1-20, July.
    5. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, number 9889.
    6. Mostafa Beshkar, 2014. "Arbitration and Renegotiation in Trade Agreements," Caepr Working Papers 2014-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    7. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.
    8. James E. Rauch & Joel Watson, 2015. "Client-Based Entrepreneurship," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(1), pages 30-60.
    9. Watson, Joel, 2020. "On the outside-option principle with one-sided options," Economics Letters, Elsevier, vol. 191(C).
    10. Göller, Daniel, 2015. "Contract, Renegotiation, and Holdup: When Should Messages be Sent?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113166, Verein für Socialpolitik / German Economic Association.
    11. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),: The Handbook of Organizational Economics, Princeton University Press.

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    More about this item

    Keywords

    trade; investments; Social and Behavioral Sciences;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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