 Uncertainty and Specific Investment with Weak Contract EnforcementJohan Swinnen and James Vercammen No 21044, 2006 Annual meeting, July 23-26, Long Beach, CA from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) Abstract: The relationship between price uncertainty and specific investment is examined in a dynamic model that integrates the theories of real options and investment holdup. Because of weak contract enforcement, bilateral firms cannot use a contract to govern their bilateral investment and exchange relationship. These firms instead rely on an implicit self-enforcing agreement, and they reduce the investment distortion by negotiating an ex ante transfer (i.e., the investment expense of one firm is partially paid for by the other firm). In the absence of uncertainty, the ex ante transfer ensures that investment hold-up is fully eliminated. Our main result is that uncertainty introduces an inefficiency into the ex ante transfer bargaining game, which in turn causes an inefficiently long delay in investment. This linkage between higher uncertainty and longer inefficient investment delay has particular relevance for developing and transition economies where high uncertainty and weak contract enforcement is common. Keywords: Risk; and; Uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea06:21044 Access Statistics for this paper More papers in 2006 Annual meeting, July 23-26, Long Beach, CA from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) Contact information at EDIRC. |
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