Cooperative Investments and the Value of Contracting

Cooperative Investments and the Value of Contracting Abstract Recent articles have shown that contracts can support the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting. These studies typically considered “selfish” investments that benefit the investor (e.g., the seller's investment reduces her production costs). We find very different results for “cooperative” investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). Most importantly, if committing not to renegotiate the contract is impossible, then contracting has no value, i.e., the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation. (JEL C70, J41, K12, L22 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Cooperative Investments and the Value of Contracting

American Economic Review, Volume 89 (1) – Mar 1, 1999

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Publisher
American Economic Association
Copyright
Copyright © 1999 by the American Economic Association
Subject
Articles
ISSN
0002-8282
D.O.I.
10.1257/aer.89.1.125
Publisher site
See Article on Publisher Site

Abstract

Abstract Recent articles have shown that contracts can support the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting. These studies typically considered “selfish” investments that benefit the investor (e.g., the seller's investment reduces her production costs). We find very different results for “cooperative” investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). Most importantly, if committing not to renegotiate the contract is impossible, then contracting has no value, i.e., the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation. (JEL C70, J41, K12, L22 )

Journal

American Economic ReviewAmerican Economic Association

Published: Mar 1, 1999

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