Search results for "Incomplete Contracts"
showing 5 items of 5 documents
Are discriminatory procurement policies motivated by protectionism ?
1995
When purchasing goods and services, governments often discriminate in favour of domestic suppliers. It is widely assumed that such behaviour is motivated by protectionism. Although this interpretation is sometimes valid, it is also puzzling. After reviewing some of the puzzles, the paper proposes an alternative explanation of preferential procurement based on the assumption that governmental buyers want to purchase goods and services at minimum cost, but must do this in a context in which, because of the presence of unverifiable services, contracts are necessarily incomplete. The paper argues that preferential purchasing can guarantee the efficient delivery of these unverifiable services.
How Long-Term Contracts can Mitigate Inefficient Renegotiation Arising Due to Loss Aversion
2021
A loss-averse buyer and seller face an uncertain environment. Should they write a long-term contract or wait until the state of the world is realized? I show that simple long-term contracts perform better than insinuated in Herweg and Schmidt (2015), even though loss aversion makes renegotiation sometimes inefficient. During renegotiation, the outcome induced by the long-term contract constitutes the reference point to which the parties compare gains and losses induced by the renegotiated transaction. Whereas Herweg and Schmidt consider that the long-term contract is always performed, it should not in "bad" states. This alters the threat point in renegotiation, making it easier to renegotia…
Contract, Renegotiation, and Holdup: When Should Messages be Sent?
2015
I consider a setting of complete but unverifiable information in which two agents enter a contractual relationship to induce mutually beneficial investments. As my main result, I establish that the famous irrelevance of contracting paradigm, that arises due to the detrimental effect of renegotiation, is resolved if there is a fixed point in time when actions have to be chosen and one accounts for the fact that renegotiation takes time. What drives my optimality result is that, by stipulating when the mechanism is to be played, the agents ensure that renegotiation is possible ex ante but not ex post.
For Whom is MAI? A Theoretical Perspective on Multilateral Agreements on Investments
2001
Why do we observe some LDCs objecting the prospect of a Multilateral Agreement on Investment (MAI), although they have been keen to liberalize investment in preferential agreements in recent years? In this paper, we analyse the issue of MAI implementation and assess the welfare consequences of such kind of agreements. In our model, participation to MAI involves a trade-off between less rent extraction from multinational firms (MNEs) and more abundant FDI inflows. At equilibrium, either all countries enter MAI, or all countries stay out, or only some of them enter. Coordination problems may induce multiple equilibria: the three typesof equilibria may coexist. So, the implementation of MAI ma…
Expectation Damages and Bilateral Cooperative Investments
2012
We examine the efficiency of the standard breach remedy expectation damages in a setting where the buyer invests cooperatively and the seller invests both cooperatively and selfishly. Contracts may specify a required quality level and an upper bound to the seller's coordination costs. We find that it is optimal to write an augmented Cadillac contract in which quality is stipulated such that it cannot be met with positive probability together with a very low price. Thus, the seller becomes a residual claimant and the coordination-cost threshold can be used to balance the incentives of the buyer.