Investments, Holdup, and the Form of Market Contracts

W. Bentley Macleod (wbmacleod@wbmacleod.net) and James Malcomson

American Economic Review, 1993, vol. 83, issue 4, 811-37

Abstract: The authors analyze incomplete contracts to induce efficient investment. With exogenous switching costs, fixed-price contracts are efficient, generate some rigidity in prices, are renegotiated intermittently by possibly small amounts, and when inflation is positive, generate asymmetric responses to shocks, all consistent with evidence on prices and wages. With two-sided specific investments, efficiency requires prices to have sufficient escalator clauses to avoid renegotiation, as observed in many long-term contracts. A third case, with one-sided specific investments, can generate 'take or pay' contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly. Copyright 1993 by American Economic Association.

Date: 1993
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Related works:
Working Paper: Investments, Hold Up and the Reform of Market Contracts (1991)
Working Paper: INVESTMENTS, HOLD UP AND THE REFORM OF MARKET CONTRACTS (1991)
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