Specificity revisited: The role of cross-investments

Matthew Ellman ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Previous analysis has shown that traders may opt for specific technologies with no joint productivity advantage as a way to commit themselves to trading jointly, but only when long-term contracting is infeasible. This paper proves that speciÞcity can also be optimal (by relaxing the budget-balance constraint) in settings with long-term contracting. Traders will opt for specificity when one trader makes a cross-investment and either (1) this cross-investment has a direct externality on the other trader, (2) both parties invest, or (3) private information is present. The specificity (e.g. from non- salvageable investments, specific assets and technologies, narrow business strategies, and exclusivity restrictions) is equally effective regardless of which trader's alternative trade payoff is reduced. Specificity supports long-term contracts in a broad range of settings - both with and without renegotiation. The theory also offers a novel perspective on franchising and vertical integration.

Keywords: Specificity; hostages long-term contracting; cross-investments; budget-balance; renegotiation (search for similar items in EconPapers)
JEL-codes: D23 K40 (search for similar items in EconPapers)
Date: 2004-11, Revised 2005-01
New Economics Papers: this item is included in nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Specificity Revisited: The Role of Cross-Investments (2015)
Journal Article: Specificity Revisited: The Role of Cross-Investments (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:799

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