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

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Listed author(s):
  • 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.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt3923q7kz.

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Date of creation: 03 Oct 2009
Handle: RePEc:cdl:ucsdec:qt3923q7kz
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Keywords: trade; investments; Social and Behavioral Sciences;

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Find related papers by 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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Cited by:

  1. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
  2. 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.
  3. Göller, Daniel, 2015. "Contract, Renegotiation, and Holdup: When Should Messages be Sent?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113166, Verein für Socialpolitik / German Economic Association.
  4. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-20, July.
  5. repec:inu:caeprp:2014004 is not listed on IDEAS
  6. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, number 9889, March.
  7. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), : The Handbook of Organizational Economics Princeton University Press.
  8. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-40, August.
  9. James E. Rauch & Joel Watson, 2015. "Client-Based Entrepreneurship," Journal of Law, Economics and Organization, Oxford University Press, vol. 31(1), pages 30-60.

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