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Costly Coasian Contracts

  • Luca Anderlini
  • Leonardo Felli

We identify and investigate the basic `hold-up' problem which arises whenever each party to a contingent contract has to pay some ex-ante cost for the contract to become feasible. We then proceed to show that, under plausible circumstances, a `contractual solution' to this hold-up problem is not available. This is because a contractual solution to the hold-up problem typically entails writing a `contract over a contract' which generates a fresh set of ex-ante costs, and hence is associated with a new hold-up problem. We conclude the paper investigating two applications of our results to a static and to a dynamic principal-agent model.

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Paper provided by Penn Economics Department in its series Penn CARESS Working Papers with number c5b2efc4326ca8bb8162440d62ce6510.

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Handle: RePEc:cla:penntw:c5b2efc4326ca8bb8162440d62ce6510
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  10. Luca Anderlini & Leonardo Felli, 1998. "Costly Coasian Contracts," STICERD - Theoretical Economics Paper Series 362, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  25. William P. Rogerson, 1992. "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 777-793.
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