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
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: Suggested Citation
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