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RESEARCH PRODUCT

Specific investments and coordination failures

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This note presents a new result on incomplete contracts. We show that if the different degrees of relation-specificity of the partnerts' investments determines their ex post bargaining position (what Williamson (1985) calls “the fundamental transformation†), it will appear a potential coordination failure. Under plausible conditions, the parties will coordinate in the more inefficient but less risky equilibrium, that is, in the risk-dominant equilibrium in the sense of Harsanyi and Selten (1988).