Strategic Capacity Investment Under Hold-Up Threats: The Role of Contract Length and Width

26 Pages Posted: 13 Feb 2010 Last revised: 5 Jun 2015

See all articles by Laure Durand-Viel

Laure Durand-Viel

Université Paris Dauphine

Bertrand Villeneuve

Université Paris-Dauphine, PSL Research University

Date Written: July 19, 2014

Abstract

We analyze the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two-part tariffs, the length of the contract is irrelevant: the surplus is maximal and goes to the seller. In linear contracts, the seller prefers the shortest contract and the buyer the longest one. Further, the commitment period concentrates the incentives, whereas afterwards there is rent extraction. The socially efficient contract is as short as possible; yet, long contracts can be promoted because of the surplus they allocate to the buyer.

Keywords: Long-term Contracts, Incomplete Contracting, Infrastructure Investment

JEL Classification: D42, D45, D92, L95

Suggested Citation

Durand-Viel, Laure and Villeneuve, Bertrand, Strategic Capacity Investment Under Hold-Up Threats: The Role of Contract Length and Width (July 19, 2014). Available at SSRN: https://ssrn.com/abstract=1552286 or http://dx.doi.org/10.2139/ssrn.1552286

Laure Durand-Viel

Université Paris Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Bertrand Villeneuve (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

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