Direct externalities, specific performance and renegotiation design

Abstract

This paper examines how the model of De Fraja [Games and Economic Behavior, 1999] can be amended after Che [Games and Economic Behavior, 2000] negative result. We mainly show that the optimal level of investments can be obtained with the specific performance contract considered by De Fraja if the renegotiation process does not follow the Hart-Moore procedure but allocates an extreme bargaining power.incomplete contract hold-up