Costly Contingent Contracts

Luca Anderlini and Leonardo Felli

STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: 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.

Date: 1996-10
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stitep:/1996/313

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