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

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  • Buzard, Kristy
  • Watson, Joel
Abstract
This paper examines a class of contractual relationships with specific investment, a non-durable trading opportunity, and renegotiation. Trade actions are modeled as individual and trade-action-based option contracts (“non-forcing contracts”) are explored. The paper identifies an important distinction, between divided and unified investment and trade actions, that plays a key role in determining whether efficient investment and trade can be achieved. By using non-forcing contracts, the party without the trade action can be made residual claimant with regard to the investment action, which implies that an efficient outcome can be achieved in the divided case but not typically in the unified case. More generally, the paper shows that, with ex post renegotiation, constraining parties to use “forcing contracts” implies a strict reduction in the set of implementable value functions. Tools are developed for calculating the “punishment values” that determine the sets of implementable post-investment value functions.

Suggested Citation

  • Buzard, Kristy & Watson, Joel, 2010. "Contract, Renegotiation, and Hold Up: Results on the Technology of Trade and Investment," University of California at San Diego, Economics Working Paper Series qt3df3q4vg, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt3df3q4vg
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    References listed on IDEAS

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    Cited by:

    1. Joel Watson & David A. Miller & Trond E. Olsen, 2020. "Relational Contracting, Negotiation, and External Enforcement," American Economic Review, American Economic Association, vol. 110(7), pages 2153-2197, July.
    2. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.
    3. Göller, Daniel, 2015. "Contract, Renegotiation, and Holdup: When Should Messages be Sent?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113166, Verein für Socialpolitik / German Economic Association.
    4. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
    5. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, vol. 4(3), pages 1-20, July.
    6. Watson, Joel, 2020. "On the outside-option principle with one-sided options," Economics Letters, Elsevier, vol. 191(C).
    7. Ilya Segal & Michael D.Whinston, 2012. "Property Rights [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    8. Robert Gibbons & John Roberts, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
    9. Mostafa Beshkar, 2016. "Arbitration and Renegotiation in Trade Agreements," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(3), pages 586-619.
    10. 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.

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    More about this item

    Keywords

    forcing contracts; punishment values; Social and Behavioral Sciences;
    All these keywords.

    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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