Cooperative Investments and the Value of Contracting

Yeon-Koo Che and D.B. Hausch

Working papers from Wisconsin Madison - Social Systems

Abstract: Several recent articles have shown that the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting, can be supported with appropriately-designed contracts. These studies have, for the most part, restricted attention to so called "selfish" investments that benefit the investor (e.g., the seller's investment reduces her cost of producing the good). 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). If the parties can commit not to renegotiate, schemes exist that can achieve the efficient outcome as a subgame perfect equilibrium.

Keywords: TRADE; INVESTMENTS (search for similar items in EconPapers)
JEL-codes: E20 E22 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1997
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Citations: View citations in EconPapers (4)

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Journal Article: Cooperative Investments and the Value of Contracting (1999)
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