Strategic Capacity Investment under Hold‐up Threats: The Role of Contract Length and Width

Laure Durand-Viel and Bertrand Villeneuve
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Laure Durand-Viel: Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres

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Abstract: We analyze the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two‐part tariffs, the length of the contract is irrelevant: the surplus is maximal and goes to the seller. In linear contracts, the seller prefers the shortest contract and the buyer the longest one. Further, the commitment period concentrates the incentives, whereas afterwards there is rent extraction. The socially efficient contract is as short as possible; yet, long contracts can be promoted because of the surplus they allocate to the buyer.

Keywords: Long-term Contracts; Incomplete Contracting; Infrastructure Investment (search for similar items in EconPapers)
Date: 2015
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Published in Manchester School, 2015, 84 (3), ⟨10.1111/manc.12100⟩

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Related works:
Journal Article: Strategic Capacity Investment under Hold-up Threats: The Role of Contract Length and Width (2016)
Working Paper: Strategic Capacity Investment under Holdup Threats: The Role of Contract Length and Width (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02281606

DOI: 10.1111/manc.12100

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