Next Article in Journal / Special Issue
Contract and Game Theory: Basic Concepts for Settings with Finite Horizons
Previous Article in Journal
An Evolutionary Theory of Suicide
Previous Article in Special Issue
The Renegotiation-Proofness Principle and Costly Renegotiation
Games 2013, 4(3), 437-456; doi:10.3390/g4030437

Noncontractible Investments and Reference Points

Department of Economics, Harvard University, Littauer 220, Cambridge, MA 02138, USA
Received: 25 April 2013 / Revised: 27 June 2013 / Accepted: 2 August 2013 / Published: 14 August 2013
(This article belongs to the Special Issue Contract Theory)
View Full-Text   |   Download PDF [462 KB, uploaded 14 August 2013]


We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer’s value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take-it-or-leave-it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller’s offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.
Keywords: incomplete contracts; noncontractible investments; reference points; asset ownership incomplete contracts; noncontractible investments; reference points; asset ownership
This is an open access article distributed under the Creative Commons Attribution License (CC BY) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Share & Cite This Article

Further Mendeley | CiteULike
Export to BibTeX |
EndNote |
MDPI and ACS Style

Hart, O. Noncontractible Investments and Reference Points. Games 2013, 4, 437-456.

View more citation formats

Related Articles

Article Metrics

For more information on the journal, click here


[Return to top]
Games EISSN 2073-4336 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert