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Breaking and entering’ of contracts as a matter of bargaining power and exclusivity clauses

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  • S. Rosenkranz
  • G.U. Weitzel

Abstract

We analyze the effect of liquidated damage rules in exclusive contracts that are negotiated in a sequential bargaining process between one seller and two buyers with endogenous outside options. We show that assumptions on the distribution of bargaining power influence the size of the payment of damages and determine which contractual party benefits from including liquidated damage rules. Furthermore, we show that the effect of the payment of damages on the efficiency of the consummated deals depends on the possibility to sign more than one contract. Only if this is not possible, damage rules may prevent the breaking and entering of contracts and thus lead to inefficient deals in the market of corporate control, or allow for ‘naked’ exclusion in the context of supplier contracts with externalities.

Suggested Citation

  • S. Rosenkranz & G.U. Weitzel, 2011. "Breaking and entering’ of contracts as a matter of bargaining power and exclusivity clauses," Working Papers 11-06, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1106
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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/218761/11-06.pdf
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    References listed on IDEAS

    as
    1. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.
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    More about this item

    Keywords

    sequential bargaining; bargaining power; outside option; liquidated damage rules; termination fees; exclusivity agreements;
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