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Contractual signalling, relationship-specific investment and exclusive agreements

  • Vasconcelos, Luis

I analyze a simple model of hold-up with asymmetric information at the con- tracting stage. I show that contractual signalling and e¢ ciency of investment can con?ict if only quantity is contractible. This is because contracted quantity encourages investment in the relationship but also signals information. This con?ict generates ine¢ cient equilib- ria in terms of investment. Contracting on exclusivity in addition to quantity resolves the con?ict (and consequently eliminates the ine¢ ciency of investment) when the asymmetry of information concerns the value of trade with external parties. While exclusivity also signals information, unlike quantity it does not directly a¤ect relationship-speci?c investment.

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Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp495.

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Length: 51 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:unl:unlfep:wp495
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