Advertisement

Incomplete Contract, Transaction-Specific Investment, and Bargaining Power

  • Moriki HosoeEmail author
Chapter
  • 6 Downloads

Abstract

In this paper, after reviewing the basic concepts of incomplete contract, we conduct a fundamental analysis of the transaction mechanism, focusing on the role of bargaining power and transaction-specific investment. When one considers a basic pattern of market transaction (one-to-one and buyer-to-seller transaction), one finds that two important questions—what information who holds and who holds bargaining power—have an extremely important influence on the model and the outcome of the transaction. Moreover, the effectiveness of bargaining power depends on various factors related to the environment in which the transaction occurs (e.g. the existence of external options, the structure of information possession, and so forth).

References

  1. Aghion, P., M. Dewatripont, P. Legros, and L. Zingales. 2016. The impact of incomplete contracts on economics. Oxford: Oxford University Press.Google Scholar
  2. Aghion, P., M. Dewatripont, and P. Rey. 1989. On renegotiation design under symmetric information. European Economic Review 34 (2/3): 322–329.Google Scholar
  3. Crawford, V. 1988. Long-term relationships governed by short-term contracts. American Economic Review 78 (3): 485–499.Google Scholar
  4. Demski, J.S., E. David, and M. Sappington. 1991. Resolving double moral hazard problems with buyout agreements. Rand Journal of Economics 22: 232–240.Google Scholar
  5. Edlin, A.S., and B.E. Hermalin. 2000. Contract renegotiation and options in agency problems. Journal of Law. Economics, and Organization 16: 395–423.Google Scholar
  6. Farrell, J., and C. Shapiro. 1989. Optimal contracts with lock-in. American Economic Review 79 (1): 51–68.Google Scholar
  7. Goltsman, M. 2011. Optimal information transmission in a holdup problem. Rand Journal of Economics 42: 495–526.Google Scholar
  8. Green, J., and J.J. Laffont. 1987. Contract renegotiation and the underinvestment effect. Econometrica 55: 69–94.CrossRefGoogle Scholar
  9. Grossman, S.J., and O.D. Hart. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94 (4): 691–719.CrossRefGoogle Scholar
  10. Hart, O.D., and B. Holmstrom. 1987. Incomplete contracts and renegotiation. In Advances in economic theory, fifth world congress, ed. T. Bewley. Cambridge: Cambridge University Press.Google Scholar
  11. Hart, O.D., and J. Moore. 1988. The theory of contracts. Econometrica 56: 755–785.Google Scholar
  12. Hart, O., and J. Moore. 2008. Contracts as reference points. Quarterly Journal of Economics. 123 (1): 1–48.Google Scholar
  13. Huberman, G., and C. Kahn. 1988. Limited contract enforcement and strategic renegotiation. American Economic Review 78 (3): 471–484.Google Scholar
  14. Klein, B., R. Crawford, and A. Alchian. 1978. Vertical integration, appropriable rents, and the competitive contracting process. The Journal of Law and Economics 21: 297–326.CrossRefGoogle Scholar
  15. Schmitz, P.W. 2006. Information gathering, transaction costs, and the property rights approach. American Economic Review 96 (1): 422–434.Google Scholar
  16. Tirole, J. 1988. The theory of industrial organization. Cambridge: MIT Press.Google Scholar
  17. Tirole, J. 1986. Procurement and renegotiation. Journal of Political Economy 94: 235–259.CrossRefGoogle Scholar
  18. Williamson, O.E. 1979. Market and organization. New York: The Free Press.Google Scholar
  19. Williamson, O.E. 1985. Economic institutions capitalism. New York: The Free Press.Google Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.Emeritus ProfessorKyushu UniversityFukuoka cityJapan

Personalised recommendations