Exclusive Contracts and Protection of Investments

Ilya Segal and Michael Whinston

RAND Journal of Economics, 2000, vol. 31, issue 4, 603-633

Abstract: We consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship. Contrary to some informal claims in the literature, we find that exclusivity has no effect when all investments are fully specific to the relationship (i.e., are purely "internal"). Exclusivity does matter when investments affect the value of the buyer's trade with other sellers (i.e., have "external" effects). We examine the effects of exclusivity on investments and aggregate welfare, and the private incentives of the buyer-seller coalition to use it.

Date: 2000
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