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

Thomas Lyon () and Eric Rasmusen ()

No 2004-10, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

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 hold-up problems. We present a simple game that focusses 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.

Date: 2004
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Published in Journal of Law Economics and Organization, 2004

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http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2004-10-lyon-rasmusen.pdf (application/pdf)

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Journal Article: Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem (2004)
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