Noncontractible Investments and Reference Points

Oliver Hart

No 16929, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D23 D86 K12 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-bec and nep-cta
Note: CF LE
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Citations: View citations in EconPapers (8)

Published as Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, Open Access Journal, vol. 4(3), pages 437-456, August.

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