Incomplete Contracts, Irreversible Investments and Entry Deterrence

Antonio Nicita () and Massimiliano Vatiero ()

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: When renegotiation under incomplete contracts follows the outside option principle, hold-up may occur as the ex-post degree of competition increases on investor’s side. However, under this framework, asset specificity may play the counterintuitive role of an entry deterrence device, thus decreasing the probability of hold-up. Our result contrasts with standard literature in three respects: i) an equilibrium with overinvestment may emerge; ii) the 'intimidating effect' of overinvestment acts as an endogenous enforcement device; iii) a pervasive trade-off may emerge between ex-post efficient entry and ex-ante efficient specific investments

Keywords: strategic and specific investments; hold-up; outside options; entry deterrence (search for similar items in EconPapers)
JEL-codes: D23 D85 L14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta, nep-mic and nep-pke
Date: 2009-08
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Persistent link: http://EconPapers.repec.org/RePEc:usi:wpaper:566

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