Contrary to previous literature, we show that the assignment of authority decision matters in optimal contract design with bilateral specific self-investments. This is the case when we enlarge the set of the states of nature, to explicitly consider the event that a party's market option turns out to be binding ex-post. We show that, under this setting, simple contracts protected by specific performance remedies may generate hold-up and thus parties' incentives to under-invest. However, investment efficiency is enhanced when authority is assigned to the party with ex-post binding market option. Our results suggest a neglected rationale for vertical integration as a remedy against hold-up.
Nicita, A., Sepe, S.M. (2010). Optimal Contract Design with Unilateral Market Option. QUADERNI DEL DIPARTIMENTO DI ECONOMIA POLITICA, 593(593), 1-21.
Optimal Contract Design with Unilateral Market Option
NICITA, ANTONIO;SEPE, SIMONE MARIA
2010-01-01
Abstract
Contrary to previous literature, we show that the assignment of authority decision matters in optimal contract design with bilateral specific self-investments. This is the case when we enlarge the set of the states of nature, to explicitly consider the event that a party's market option turns out to be binding ex-post. We show that, under this setting, simple contracts protected by specific performance remedies may generate hold-up and thus parties' incentives to under-invest. However, investment efficiency is enhanced when authority is assigned to the party with ex-post binding market option. Our results suggest a neglected rationale for vertical integration as a remedy against hold-up.File | Dimensione | Formato | |
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https://hdl.handle.net/11365/35552
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