Costly contingent contracts

Abstract

We identify and investigate the basic ?hold-up? problem which arises whenever each party to a contingent contract has to pay some ex-ante cost for the contract to become feasible. We then proceed to show that, under plausible circumstances, a ?contractual solution? to this hold-up problem is not available. This is because a contractual solution to the hold-up problem typically entails writing a ?contract over a contract? which generates a fresh set of ex-ante costs, and hence is associated with a new hold-up problem. We conclude the paper investigating two applications of our results to a static and to a dynamic principal-agent model