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Exclusive contracts foster relationship-specific investment

By David de Meza and Mariano Selvaggi

Abstract

Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, we show that investments that are specific to the contracting parties may be encouraged by exclusivity. Results depend on the nature of investments and the bargaining solution. The major part of the analysis shows that exclusivity deals designed to “assure” the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a positive but finite damage payment yields the first-best outcome

Topics: HG Finance
Publisher: The RAND Corporation
Year: 2007
DOI identifier: 10.1111/j.1756-2171.2007.tb00045.x
OAI identifier: oai:eprints.lse.ac.uk:35929
Provided by: LSE Research Online
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