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Noncontractible Investments and Reference Points

Department of Economics, Harvard University, Littauer 220, Cambridge, MA 02138, USA

Winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016

Games 2013, 4(3), 437-456;
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)
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. View Full-Text
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 3.0).

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

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