Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem

Thomas Lyon ()

The Journal of Law, Economics, and Organization, 2004, vol. 20, issue 1, 148-169

Abstract: "Buyer-option" contracts, in which the buyer selects the product variant to be traded and chooses whether to accept delivery, are often used to solve holdup problems. We present a simple game that focuses sharply on subgames in which the buyer proposes inefficient actions in order to improve his bargaining position. We argue for one of several alternative ways to model this situation. We then apply that modeling choice to recent models of the foundations of incomplete contracts and show that a buyer-option contract is sufficient to induce first-best outcomes. Copyright 2004, Oxford University Press.

Date: 2004
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