Simple Efficient Contracts in Complex Environments

Robert Evans

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The paper studies a general model of hold-up in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modelled as an infinite-horizon non-cooperative bargaining game then, with a simple initial contract, an efficient equilibrium will generally exist. The contract gives authority to one party to set the terms of trade and gives the other party a non-expiring option to trade at these terms. The difference from standard results arises because the existing contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment.

Keywords: Incomplete Contracts; Hold-up problem; Option Contracts (search for similar items in EconPapers)
JEL-codes: D23 (search for similar items in EconPapers)
Pages: 43
Date: 2006-03
Note: ET
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Journal Article: Simple Efficient Contracts in Complex Environments (2008)
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