Exclusive Contracts Foster Relationship-Specific Investment

David de Meza and Mariano Selvaggi ()

The Centre for Market and Public Organisation from The Centre for Market and Public Organisation, University of Bristol, UK

Abstract: Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, notably Segal and Whinston (2000), we show that investments that are specific to the contracted parties may be encouraged. Results depend on the nature of the investments and whether the bargaining is cooperative or non-cooperative. The major part of the analysis show that exclusive contracts designed to 'assure' the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a finite penalty for breach achieves the first-best outcome.

Keywords: exclusive dealing; non-cooperative bargaining; liquidated damages; renegotiation; resale (search for similar items in EconPapers)
JEL-codes: C70 D23 L42 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2004-06
New Economics Papers: this item is included in nep-acc and nep-com
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Citations: View citations in EconPapers (12)

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