Contractual Signalling, Relationship-Specific Investment and Exclusive Agreements

FEUNL Working Paper No. 495

33 Pages Posted: 20 Sep 2006 Last revised: 10 Jun 2008

See all articles by Luis I. Vasconcelos

Luis I. Vasconcelos

New University of Lisbon - Faculdade de Economia

Date Written: December 2007

Abstract

I analyze a simple model of hold-up with asymmetric information at the contracting stage. I show that contractual signalling and efficiency of investment can conflict if only quantity is contractible. This is because contracted quantity encourages investment in the relationship but also signals information. This conflict generates inefficient equilibria in terms of investment. Contracting on exclusivity in addition to quantity resolves the conflict (and consequently eliminates the inefficiency of investment) when the asymmetry of information concerns the value of trade with external parties. While exclusivity also signals information, unlike quantity it does not directly affect relationship-specific investment.

Keywords: Contractual commitment, asymmetric information, hold-up, principal-agent

JEL Classification: D82, L14, L40, K21

Suggested Citation

Vasconcelos, Luis I., Contractual Signalling, Relationship-Specific Investment and Exclusive Agreements (December 2007). FEUNL Working Paper No. 495, Available at SSRN: https://ssrn.com/abstract=931427 or http://dx.doi.org/10.2139/ssrn.931427

Luis I. Vasconcelos (Contact Author)

New University of Lisbon - Faculdade de Economia ( email )

Campus de Campolide
Lisboa, 1099-032
Portugal
+35121380172 (Phone)

HOME PAGE: http://docentes.fe.unl.pt/~lipv064/

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