Noncontractible Investments and Reference Points

27 Pages Posted: 11 Apr 2011 Last revised: 13 Apr 2011

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: April 2011

Abstract

We analyze noncontractible investments in a model with shading. A seller can make an investment that affects a buyer's value. The parties have outside options that depend on asset ownership. When shading is not possible and there is no contract renegotiation, an optimum can be achieved by giving the seller the right to make a take‐it‐or‐leave‐it offer. However, with shading, such a contract creates deadweight losses. We show that an optimal contract will limit the seller's offers, and possibly create ex post inefficiency. Asset ownership can improve matters even if revelation mechanisms are allowed.

Suggested Citation

Hart, Oliver D., Noncontractible Investments and Reference Points (April 2011). NBER Working Paper No. w16929, Available at SSRN: https://ssrn.com/abstract=1805434

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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