Specific Investments, Flexible Adaptation, and Requirement Contracts

Tian Zhu

Economic Inquiry, 2003, vol. 41, issue 2, 299-304

Abstract: In a simple hold-up model with contractible cost-related variables, I show that an optimal requirement contract with "standard cost"--based nonlinear pricing can provide both ex post flexibility for adaptation and ex ante incentives for relationship-specific investments. The result is related to contractual arrangements observed in vertical procurement relationships. Copyright 2003, Oxford University Press.

Date: 2003
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