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Strategic Capacity Investment under Hold‐up Threats: The Role of Contract Length and Width

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Date
2015
Dewey
Microéconomie
Sujet
Long-term Contracts; Incomplete Contracting; Infrastructure Investment
JEL code
L.L9.L95; D.D4.D42; D.D4.D45
Journal issue
Manchester School
Volume
84
Number
3
Publication date
2015
Article pages
313-339
Publisher
Wiley
DOI
http://dx.doi.org/10.1111/manc.12100
URI
https://basepub.dauphine.fr/handle/123456789/19716
Collections
  • LEDa : Publications
Metadata
Show full item record
Author
Durand-Viel, Laure
status unknown
Villeneuve, Bertrand
163511 Laboratoire d'Economie de Dauphine [LEDa]
Type
Article accepté pour publication ou publié
Abstract (EN)
We analyze the impact of the length of incomplete contracts on investment and surplus sharing. In the bilateral relationship explored, the seller controls the input and the buyer invests. With two‐part tariffs, the length of the contract is irrelevant: the surplus is maximal and goes to the seller. In linear contracts, the seller prefers the shortest contract and the buyer the longest one. Further, the commitment period concentrates the incentives, whereas afterwards there is rent extraction. The socially efficient contract is as short as possible; yet, long contracts can be promoted because of the surplus they allocate to the buyer.

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