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Keywords = noncontractible investments

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20 pages, 462 KiB  
Article
Noncontractible Investments and Reference Points
by Oliver Hart
Games 2013, 4(3), 437-456; https://doi.org/10.3390/g4030437 - 14 Aug 2013
Cited by 16 | Viewed by 9137
Abstract
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 [...] Read more.
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. Full article
(This article belongs to the Special Issue Contract Theory)
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