The Limitations of Buyer-Option Contracts in Solving the Holdup Problem

Posted: 17 Jun 2008

See all articles by Abraham L. Wickelgren

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: April 2007

Abstract

In a recent article, Lyon and Rasmusen (2004) argue that buyer-option contracts are more effective at solving the holdup problem than has been previously recognized. This article examines the robustness of that claim to changes in the bargaining game they analyze and to changes in the nature of the trade between the buyer and seller. I find that the possibility of renegotiation in a model of cooperative investment (Che and Hausch 1999) does generate a holdup problem if the players discount the future and the bargaining game is sufficiently long. This change in the bargaining game does not resurrect the holdup problem in the basic product complexity model (of Hart and Moore 1999). However, if the good to be traded must be supplied continually rather than only one time, then the holdup problem reemerges (even with buyer-option contracts) for some parameter values.

Suggested Citation

Wickelgren, Abraham L., The Limitations of Buyer-Option Contracts in Solving the Holdup Problem (April 2007). The Journal of Law, Economics, & Organization, Vol. 23, Issue 1, pp. 127-140, 2007. Available at SSRN: https://ssrn.com/abstract=1146875 or http://dx.doi.org/10.1093/jleo/ewm005

Abraham L. Wickelgren (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
339
PlumX Metrics