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

Listed author(s):
  • Watson, Joel
  • Buzard, Kristy

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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  9. Joel Watson, 2002. "Contract, Mechanism Design, and Technological Detail," Theory workshop papers 505798000000000006, UCLA Department of Economics.
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  14. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
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  22. Yeon-Koo Che & Jozsef Sakovics, 2001. "A Dynamic Theory of Holdup," ESE Discussion Papers 74, Edinburgh School of Economics, University of Edinburgh.
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  24. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
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  26. Joel S. Demski & David E.M. Sappington, 1991. "Resolving Double Moral Hazard Problems with Buyout Agreements," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 232-240, Summer.
  27. Alexander Stremitzer, 2012. "Standard Breach Remedies, Quality Thresholds, and Cooperative Investments," Journal of Law, Economics and Organization, Oxford University Press, vol. 28(2), pages 337-359.
  28. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  29. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 139-149.
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  32. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
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