Holdups, Standard Breach Remedies, and Optimal Investment /
Edlin, Aaron S.
Holdups, Standard Breach Remedies, and Optimal Investment / Aaron S. Edlin, Stefan Reichelstein. - Cambridge, Mass. National Bureau of Economic Research 1995. - 1 online resource: illustrations (black and white); - NBER working paper series no. w5007 . - Working Paper Series (National Bureau of Economic Research) no. w5007. .
February 1995.
We consider a bilateral trading problem in which one or both parties makes relationship-specific investments before trade. Without adequate contractual protection, the prospect of later holdups discourages investment. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after uncertainty about the desirability of trade is resolved. We find that such contracts can induce one party to invest efficiently when either a breach remedy of specific performance or expectation damages is applied. Specific performance can also induce both parties to invest efficiently, provided a separability condition holds. In contrast, expectation damages is poorly suited to solve bilateral investment problems.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Holdups, Standard Breach Remedies, and Optimal Investment / Aaron S. Edlin, Stefan Reichelstein. - Cambridge, Mass. National Bureau of Economic Research 1995. - 1 online resource: illustrations (black and white); - NBER working paper series no. w5007 . - Working Paper Series (National Bureau of Economic Research) no. w5007. .
February 1995.
We consider a bilateral trading problem in which one or both parties makes relationship-specific investments before trade. Without adequate contractual protection, the prospect of later holdups discourages investment. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after uncertainty about the desirability of trade is resolved. We find that such contracts can induce one party to invest efficiently when either a breach remedy of specific performance or expectation damages is applied. Specific performance can also induce both parties to invest efficiently, provided a separability condition holds. In contrast, expectation damages is poorly suited to solve bilateral investment problems.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.