Option Contracts and Renegotiation - a Solution to the Hold-Up Problem

Posted: 22 Sep 2004

See all articles by Georg Nöldeke

Georg Nöldeke

University of Basel; University of Basel

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Abstract

In this article, we analyze the canonical hold-up model of Hart and Moore under the assumption that the courts can verify delivery of the good by the seller. It is shown that no further renegotiation design is necessary to achieve the first best: simple option contracts, which give the seller the right to take the delivery decision and specify payments depending on whether delivery takes place, allow implementation of efficient investment decisions and efficient trade.

Keywords: Incomplete contracts, hold-up problem

JEL Classification: D23, D82, L14, L22

Suggested Citation

Nöldeke, Georg and Schmidt, Klaus M., Option Contracts and Renegotiation - a Solution to the Hold-Up Problem. RAND Journal of Economics, Vol. 26, No. 2, pp. 163-179, Summer 1995. Available at SSRN: https://ssrn.com/abstract=593741

Georg Nöldeke (Contact Author)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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