Incomplete Contracts with Cross-Investments
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Sergei Guriev
We study an incomplete contract model where both contracting parties can invest, and the investments have both self- and cross-effects. We analyze the performance of non-contingent contracts, message games, option contracts and property rights. We find that the first best is implemented if (i) the cross effects are negative or weaker than self-effects; (ii) the strength of cross-effects relative to self-effects is symmetric across parties. If either of these conditions is violated, even message contingent revelation mechanisms fail to provide efficient incentives. For this case, we obtain a number of results characterizing the second best. We find that property rights outperform contracts and partially relax the symmetry constraint. In either first best or second best, the stronger the cross-effects, the lower the value of contracting. The optimal allocation of property rights assigns ownership to the party with stronger cross-effects.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Artikel in diesem Heft
- Topics Article
- Non-robustness of some economic models
- Incentives for Boundedly Rational Agents
- On Non-responsiveness in Adverse Selection Models with Common Value
- Contributions Article
- Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy
- A One-Period Version of Rubinstein's Bargaining Game
- Upgrading, Degrading, and Intertemporal Price Discrimination
- Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis
- Incomplete Contracts with Cross-Investments
- Communication and Voting with Double-Sided Information
- Signal Jamming in Games with Multiple Senders
- Homothetic or Cobb-Douglas Behavior Through Aggregation
- Advances Article
- The Generalized Linear Production Model: Solvability, Nonsubstitution and Productivity Measurement
- Contagion and State Dependent Mutations
- Rationalization and Incomplete Information
- Contractual Externalities and Common Agency Equilibria
- Market Research and Market Design
Artikel in diesem Heft
- Topics Article
- Non-robustness of some economic models
- Incentives for Boundedly Rational Agents
- On Non-responsiveness in Adverse Selection Models with Common Value
- Contributions Article
- Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy
- A One-Period Version of Rubinstein's Bargaining Game
- Upgrading, Degrading, and Intertemporal Price Discrimination
- Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis
- Incomplete Contracts with Cross-Investments
- Communication and Voting with Double-Sided Information
- Signal Jamming in Games with Multiple Senders
- Homothetic or Cobb-Douglas Behavior Through Aggregation
- Advances Article
- The Generalized Linear Production Model: Solvability, Nonsubstitution and Productivity Measurement
- Contagion and State Dependent Mutations
- Rationalization and Incomplete Information
- Contractual Externalities and Common Agency Equilibria
- Market Research and Market Design
