Noncontractible investments and reference points

DOI10.3390/G4030437MaRDI QIDQ2351241zbMATH OpenOpenAlexFDO

Authors Oliver D. Hart

Publication date 23 June 2015

Published in Games (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.3390/g4030437

zbMATH Keywords

asset ownershipincomplete contractsmonopolynoncontractible investmentsreference points

Mathematics Subject Classification ID

Applications of game theory (91A80) Microeconomic theory (price theory and economic markets) (91B24)

Review text

Summary: We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer's value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take-it-or-leave-it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller's offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.

Recommendations

• Investments as signals of outside options
• Contract, renegotiation, and holdup: results on the technology of trade and investment
• Hold-up, asset ownership, and reference points
• Efficient non-contractible investments in large economies.
• Renegotiation Design with Unverifiable Information

Cites work

• A theory of firm scope
• Hold-up, asset ownership, and reference points
• Subgame Perfect Implementation
• Subgame-perfect implementation under information perturbations
• Unforeseen Contingencies and Incomplete Contracts

Cited in

(2)

• Asset ownership and the threat to sell
• Completely relationship-specific investments, transaction costs, and the property rights theory

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