Renegotiation and the Efficiency of Investments

Posted: 2 Dec 1998

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

In a longterm relationship between two parties, one party's threat of a unilateral violation of an initial contract may induce a renegotiation of the contract. As a renegotiation may result in one party capturing some of the return from the other's investments, this possibility may lead to underinvestment. I show that if there is uncertainty associated with the outcome of a renegotiation, and if players are risk averse, there will be an interval for the initial contract so that it is not renegotiated. By an appropriate choice of the initial contract, underinvestment can thus be avoided.

JEL Classification: D21, D24

Suggested Citation

Holden, Steinar, Renegotiation and the Efficiency of Investments. Available at SSRN: https://ssrn.com/abstract=138974

Steinar Holden (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+47 22 85 51 56 (Phone)
+47 22 85 50 35 (Fax)

HOME PAGE: http://folk.uio.no/~sholden/

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
537
PlumX Metrics